Lord Myners blasts LSE and Deutsche Boerse merger: Concerns over cronyism and undercapitalized electronic trade clearing

Allegations of the ‘old school tie’ network playing its part in the proposed ‘merger of equals’ between two traditional exchanges, London Stock Exchange and Deutsche Boerse, have surfaced this week, with several senior London regulatory officials and former City Minister Baron Paul Myners CBE having voiced their concerns over the methodology behind the proposed merger.

Lord Myners, who served as Financial Services Secretary to the Treasury between October 2008 and May 2010 under the Labor government of the time and has several senior executive positions behind him which were within large institutions including NatWest and RBS, as well as Lord Rothschild’s RIT Capital Partners where he serves as a board member since August 2010, has a vested interest in the merger, as he was appointed Chair of Governors at the London Stock Exchange n 2014.

Deutsche Boerse and London Stock Exchange have been working on – and have pretty much agreed – a £20 billion merger which would place them as a tour de force among European exchanges, however London officials have revealed serious reservations regarding the way that the merger discussions were conducted, and the potential modus operandi of the entity post-merger.

In particular, Lord Myners, along with senior regulators in London, have concerns relating to how clearing operations can be expanded across both exchanges.

According to laws in America and Europe, notably the Dodd-Frank Wall Street Reform Act and the EMIR (European Market Infrastructure Regulation), exchange-traded swap contracts must be cleared through specific electronic clearing houses, a process which engenders greater transparency and in the case of London Stock Exchange, its own subsidiary LCH.Clearnet is used for this purpose.

The case in point here is that nowadays, with large banks better capitalized, transactions are now being passed to institutions with very little capital at all therefore if large trades went wrong, there could be massive exposure, and as a result, a question mark hangs over the corporate governance of a new entity consisting of the London Stock Exchange and Deutsche Boerse with its head offices in two separate countries, which could lead to a shirking of responsibilities by British and European regulators, or a degree of buck-passing. Counterparty risk is, after all, a very important subject post SNB EURCHF peg removal.

The incumbent Chairman of the Treasury Select Committee Andrew Tyrie is on the fence regariding the potential British exit from the European Union, however he has been vocal regarding the standardized EU regulations across all industry sectors, stating that there is absolutely no reason to fear a standard EU ruling on all industry matters. Indeed, Mr. Tyrie’s perspective on this matter is evident here, as he does not fear the potential difficulties which could arise from a merger between Britain and Germany’s flagship traditional exchanges, as it would appear to be manageable via standardized regulation.

However, if something does go awry and hand-wringing occurs between German and British regulators, then the effect on the Square Mile could be potentially vast. On this basis, politics should be left aside in favor of business acumen and suitability for purpose.

Seasoned London-based critics including prominent City journalist Alex Brummer, author of several books including “The Crunch” which looked closely at the reasons behind the 2008 credit crisis, have regaled indications from regulators that the sentiment within the offices of the authorities is that the merger proposals between London Stock Exchange and Deutsche Boerse have taken place over ‘cosy tea parties.’

London Stock Exchange acquired Borsa Italiana in 2007, during which time FinanceFeeds CEO Andrew Saks-McLeod spoke to then incumbent London Stock Exchange CFO Jonathan Howell at the London Stock Exchange’s then-new Paternoster Square headquarters.

At that time, Mr. Howell explained that, whilst time consuming, the acquisition was indeed that – a pure acquisition in which London Stock Exchange would become the owner of the Italian stock exchange, making its corporate decisions from London, a far easier way to manage a large entity, however with the uncertainty of future cross-border regulation in the advent of the Brexit, and an ‘equal’ merger between a British and German exchange, governance may well be somewhat different.

Photograph: 30 St Mary Axe, London. Copyright FinanceFeeds