Breaking: FXCM finally lets go of FastMatch, Euronext set to acquire it and expand to global FX markets

It was inevitable that a listed derivatives venue would acquire FastMatch, as it has been the subject of M&A interest by some of Chicago’s finest in the past. Following FXCM’s recent plight, FastMatch is now on its way to a new owner, that being Euronext, representing another step in the direction of OTC FX for the exchanges

Yet another expansion by the listed derivatives venues into FX is about to take place, as Euronext prepares to acquire FastMatch.

  • Acquisition of the FastMatch FX electronic communication network (ECN) market with leading-edge technology, entrepreneurial spirit and access to a large, transparent and diversified pool of liquidity, renowned for speed and transparency. After four years of consecutive growth, in Q2 of this year to date FastMatch claims that it has registered record ADV of $20.8 billion.
  • Key highlights of the transaction:

This transaction will represent an acquisition of a c.90% interest in FastMatch for initial cash consideration of $153 million at closing (on a debt-free cash-free basis), a contingent earn-out payment for an additional $10 million and customary minority rights for the management of FastMatch that will remain committed to the development of the business and stay invested with a c.10% interest.

FinanceFeeds has been quite convinced for some time that FXCM, along with FastMatch’s other shareholders BNY Mellon and Credit Suisse whose equity matching engine the ECN uses, would sell the entire concern to a listed derivatives venue.

Very recently, ICE attempted to buy FastMatch for between $150 million to $200 million, however subsequent to FXCM’s demise in almost all Western markets which has taken place during the course of this year, FastMatch would be an ideal corporate asset to relinquish in order to bring in capital, plus to ensure that FastMatch maintains its USP, which is that of transparency of execution, meaning that going forward, a disassociation with FXCM would be necessary.

Almost five years have now passed since dynamic and highly regarded electronic communication network (ECN) FastMatch made its way to fruition, the product of a joint venture between Credit Suisse and FXCM.

At the time, one of its core tenets was to be able to manage market impact and lower execution costs when transacting FX spot interests, its structure including an equities crossing system which was the Credit Suisse Crossfinder matching engine.

Five years may not be very long when referring to the development cycles that occur with regard to new products and services in many commercial sectors, but within the electronic trading industry, especially on the non-bank institutional side, it is an eternity.

With FXCM now at its self-inflicted down-at-heel nadir, FastMatch, in which FXCM Inc (now Global Brokerage Inc) has held a non-controlling but large minority stake since its establishment, continues to fly the flag of high quality North American institutional trade execution prowess, unineterrupted by the shadow that FXCM’s methodologies that were outed by the National Futures Association (NFA) recently.

Back in March this year, FinanceFeeds began to consider that, with FXCM’s almost complete disintegration, and the reputational damage created by FXCM’s senior management which intentionally developed algorithmic systems that were operated by a market maker in which FXCM had an undisclosed interest in, in order to trade against its own customers and then take rebates from the market maker of up to 70% of revenues, where the fate of FXCM’s global business (except China) and the reputational damage, would leave FastMatch.

Unlike most of the OTC FX brokerages which begin their operations in the retail sector and then soon after realize that there is money to be made by selling a price feed to smaller brokerages and misleadingly adorning themselves with the institutional liquidity provider moniker, FastMatch was the product of a genuine partnership between institutional leaders and major Tier 1 banks.

Led by the astute and urbane Dmitry Galinov from the outset, the company is well positioned as a prestigious ECN in New York, and with the buying in by BNY Mellon which joined existing shareholders Credit Suisse and FXCM in 2015, the longevity and elevation away from the retail shops was further cast in stone.

This raised a question within FinanceFeeds, that being with FastMatch being of high standing, when would the existing shareholders band together and force non-controlling shareholder Global Brokerage Inc (Formely FXCM) out completely, for a nominal fee bearing in mind that the company is on its uppers.

It could have been that for the right price, Leucadia may have been a potential suitor, however has been FInanceFeeds opinion ever since the US authorities sanctioned FXCM a few months ago that shareholders in Leucadia may have taken the firm to task over its investment in FXCM, on the basis that no due diligence was conducted when FXCM very quickly and extremely proficiently brokered the deal with Leucadia for $300 million in funding in order to rectify the negative client balance exposures suffered on January 15, 2015 when the Swiss National Bank removed the peg on the EURCHF pair.

At the time, this was a masterstroke by CEO Drew Niv. who had no time at all to devise a solution which within a matter of hours was the savior of the entire corporate structure of FXCM, and Leucadia would have likely considered it to be a very good opportunity to acquire a major shareholding in one of America’s most widely renowned brokerages, however as a result of the trust that was placed in FXCM by Leucadia, and the completely unrelated factor that has been its undoing, shareholders of Leucadia will be very unlikely to take this potential $300 million loss lying down.

On this basis, they may have to overcome substantial boardroom and investor dissent to acquire any more FXCM assets, regardless of the potentially low price.

Therefore, we considered that the institutional and listed derivatives sector may take another look, and we were certainly correct, and BNY Mellon and Credit Suisse would be well positioned to encourage a move in that direction as a motive toward detaching FastMatch from any association with FXCM is likely to be on the minds of the senior executives of all shareholding entities, both within FastMatch and its corporate banking partners, largely because what FXCM did in terms of its own execution process, that being produce public reports that did not contain a modicum of transparency, is at odds with FastMatch’s ethos of complete transparency toward all counterparties and participants.

The valuation process, which has been briefly outlined in the company’s statement, will of course be interesting, largely due to the commercial will to remove FXCM from FastMatch’s list of owners as well as mitigate any loss before FXCM finally shuffles off the electronic coil, but also because there are discrepancies in the amount of shares held by FXCM.

Here are the full details:

–        Fully financed acquisition through bank debt (pro-forma net leverage below 0.1x), transaction to maintain Euronext’s ability to pursue other external growth opportunities and will be immediately accretive to Euronext’s earnings.

–        Subject to customary regulatory and anti-trust approvals and expected to close in Q3 2017.

–        Enabling further growth potential through development in Europe, market data, and derivative products.

  • Transaction to strengthen Euronext’s product and geographic diversification and accelerate growth profile:

–        Combining FastMatch’s leading-edge technology, entrepreneurial spirit and talent with Euronext’s network, brand, neutrality and industry positioning.

–        Consistent with Euronext’s “Agility for Growth” strategy: capturing opportunity arising from the environment, accelerating growth through bolt-on acquisitions, enhancing agility and strengthening core offering of servicing the real economy.

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