Exchanges go for the OTC market again, investment made in London based bond platform alongside Clearstream

Where have the exchanges been for the last few months? Three years ago they were mopping up OTC FX firms on an ‘if you can’t beat them, join them’ M&A drive. Today, this may have started again.


The ineffective wrangling between the exchange giants and OTC trading companies over the past few years can only be described as a David and Goliath battle, with David – ie the retail electronic trading firms – way out in front.

Exchanges have attempted to gain back the client bases that they have sorely lost to far more efficient, user-friendly and cost effective retail platforms by resorting to lobbying the regulators, and when that did not work, going on huge acquisition drives to pick up existing OTC derivatives firms.

Today, the exchanges are at it again, this time with the Luxembourg Stock Exchange investing in British bond issuance platform Origin, alongside fellow investor Clearstream.

Unlike shares of a company that trade on stock exchanges, most corporate bonds trade over-the-counter (OTC) Since they are not listed on major exchanges, investors must look to their brokers to arrange the purchase and sale of bonds in many cases hence here we go again with the listed derivatives leviathans attempting to get into the OTC sector via the back door.

Founded in 2015, Origin helps dealers and issuers streamline the issuance process and is currently used by over 20 dealers and 90 issuers across 50 cities worldwide.

The company says it will work with Clearstream and LuxSE on the creation of an an end-to-end, open access, straight-through digital process for issuance, settlement and listing of debt instruments, beginning with Eurobonds.

Jens Hachmeister, head of issuer services & new digital markets at Clearstream, comments: “The lack of automation in bond issuance takes up a tremendous amount of resources and hampers issuers’ capacities to adopt more flexible funding strategies. We have been approached by clients in this regard to support them in further streamlining their workflows. In Origin, we have found an innovative and experienced partner to do just that.

The value of the investment is not known, however it does represent series A financing, hence it is a substantial investment in terms of equity in the firm.

This interest has been brewing for some time. In December last year, LuxSE in Luxembourg acquired an initial stake in Origin.

At that time, Robert Scharfe, CEO of the Luxembourg Stock Exchange said: “Digital workflows will simplify and drastically improve the bond issuance process, and we are convinced that a fully digital debt origination process will bring multiple benefits to issuers and banks. Origin offers an excellent alternative to some of the inefficient and manual processes that still exist in capital markets.”

This type of diversification is quite interesting, and it would be perhaps prudent to begin to consider that the exchanges are now waking from their temporary M&A slumber and looking to mop up the innovators again.

Back in 2017, exchanges spent hundreds of millions acquiring FX firms and lobbying regulators to try to trip up the CFD companies. Now, the exchanges are nowhere to be seen and the FX brokers are doing good business, signaling a renaissance for OTC trading, however the Origin deal is a diversion from that.

2020 may well have been something of a blur, however one thing that has been overlooked and consigned to the annuls of memory is the attempt a few years ago by large global exchanges to lobby the regulators and acquire non bank FX market makers in order to force retail FX onto exchanges.

Where has this direction gone, after hundreds of millions of dollars of investment by exchanges during 2017?

Here we are three years later, and whilst the whole world goes through the most draconian and tyrannical anti-business cycle of government-led coercion, the FX brokerages are doing better than ever.

Many conversations with senior executives of retail FX brokers during the last few months have seen the forlorn looking admission that margins have been low for years and that differentiation is lacking yet budget for diversification non existent absolutely change full circle into content smiles and high trading volumes.

No longer are many brokers clutching at straws, churning so many clients or attempting to desperately buy data via affiliate marketers with dubious credentials – all activities which are frowned upon by regulators and represent desperation. Instead, growth via organic means is on the cards, and yet the lobbyists and sleepy regulators who have been sitting on their sofas with their offices closed for months have stopped listening to EUREX, Deutsche Boerse and the London Stock Exchange whining about how the innovative and urbane FX and CFD firms have spent 30 years taking their clients and the giant listed derivatives companies do not have the cost efficiency or speed of development to attract them back.

It is clear now more than ever, that the exchanges will never be able to challenge the retail FX and CFD brokerages for the same client base.

Perhaps a clear demonstration that stubbornness, excessive bureaucracy and detail-obsessed compulsiveness is sometimes a boon rather than a burden.

As 2016 drew to a close, Britain’s Financial Conduct Authority (FCA) released proposals to change the entire method by which CFDs, a core business activity for many large, longstanding and highly respected British OTC retail trading firms with loyal domestic client bases, could be provided.

This attracted the attention of absolutely every executive in the FX industry worldwide, and many, including FinanceFeeds, are of the opinion that these proposals represent a kowtowing by the British regulatory authority to lobbyists from large exchanges, whose interest is to apply enough pressure to the entire OTC derivatives industry worldwide – Germany and France have followed with various new rulings including advertising bans and CFD-related proposals – into moving onto exchanges.

Surely there are far more pressing issues for the FCA to address than the conduct of such well organized and well recognized companies, such as the FCA’s upholding of PacNet’s regulatory approval despite PacNet being listed as a criminal organization by the US Treasury recently. The FCA, instead of following the US Treasury’s lead, responded to the sanctions by defending PacNet.

Additionally, the FCA until recently allowed binary options fraudsters to run amok in England when other nations had issued outright bans and in some cases resorted to police investigations on the perpetrators. Instead of tackling this, the FCA has decided to impede the progress of the nation’s finest. You have to wonder why and who is behind it.

The recent history of many large exchange technology companies and listed derivatives marketplaces is enough to sway learned opinion in that direction too.

CME Group’s recent investigation into the possibility of embarking on a project in which it provides a rolling spot contract is a case in point, as that would position it as a direct competitor to OTC derivatives companies.

Then there was the acquisition by Deutsche Boerse in July 2015 of FX trading platform 360T for $796 million.

Deutsche Boerse became embroiled in its fraught merger with the London Stock Exchange, which was deemed monopolistic by the European Commission, however they tried to do anything they could to get it to proceed, one example being the sale of LCH SA, the European division of LSE’s clearing division LCH.Clearnet as a condition of the transaction, whose buyers would become its largest customer.

Hotspot FX, one of the world’s most renowned OTC FX ECNs was bought by BATS Global Markets for $365 million in January 2015. It is also important to look at EUREX’s direction in which by September 2017, the venue had extended its listed FX Futures and Options portfolio to include six new currency pairs while the overall minimum block trade sizes was reduced across all currency pairs to further improve hedging opportunities.

This has been a focus for Deutsche Boerse for some time. Back in 2011, Deutsche Boerse took a minority stake in British FX technology solutions provider Digital Vega which was a technology vendor to buyside and sellside firms in the OTC derivatives sector.

These are just a few examples. I have it on good authority that CBOE now wants to make the most of approaching a retail FX and CFD audience, especially after its interest in BATS, which owns Hotspot FX.

It has until this year been merger after merger.

At that time, the idea was to increase Deutsche Boerse’s positioning in the provision of pre-trade price transparency in the derivatives area for institutional investors and taking an initial footprint in the FX derivatives space. An investment agreement was signed in December, whereby Deutsche Börse will pay a US dollar amount in the single digit million range.

Similarly, EUREX bought the 360T treasury system, with the intention of moving the entire FX structure from an OTC bilateral system into an exchange clearing structure in my view. Another example of equity exchanges moving into FX was NASDAQ which wanted to launch NASDAQ FX but were unable to do so as they failed to understand the nuances of liquidty provision in an OTC trading environment vs the exchange traded products dynamics.

In addition to these M&A related indicators, the retail FX industry, large or small, is potentially the subject of a lobbying movement from the old school tie establishment who possibly view it as a 30-year old upstart business that has now become so prominent and so highly respected that the only way to bring that business back onto the traditional method of central exchange execution is to play golf at the right club.

One conversation around this time with some colleagues in London raised a quip “When it comes down to it, who do you think will win when lobbying the regulators? IG Markets or the London Stock Exchange?”

At the time, it seemed clear that this was a David and Goliath battle in which Goliath would win, and indeed the efforts of former CEO Peter Hetherington, one of the most committed career CEOs in the industry, to form a counter lobby group to go to the FCA and plead a case not to tread on CFD conditions was largely ignored by the government, seeing Mr Hetherington resign from his position just a few months later after 24 years at the top, his leadership having brought IG Group to the excellent condition that it is in today.

Here we are 3 years later, and IG Group is still going from strength to strength. One of its ingenious methods of skirting the exchange lobby was to open IG Bank in Switzerland.

Relatively shortly after the establishment of IG Bank by British stalwart IG Group, FinanceFeeds met with IG Bank’s CEO, Fouad Bajjali at the company’s ultra-modern headquarters on the shores of Lake Geneva which would not be out of place in Singapore or Hong Kong, and are located in a building which is home to several Geneva fashion outfits and the Rooftop 42 bar which is a well known haunt for many of Switzerland’s top financial executives.

Mr. Bajjali explained to FinanceFeeds “Switzerland requires that all entities which operate within the FX industry, provide FX technology or operate as an electronic brokerage, are banks, and that there should be no variable factors which other companies face all the time in other parts of Europe.”

“For example, in Switzerland, there are no companies which operate here by passporting from elsewhere under the MiFID rules which allow it, because Switzerland is not an EU member, and also does not allow any firm to operate without being a Swiss bank. All of the FX companies in Switzerland are fully regulated by Swiss banking licenses” he said.

This places the company’s high net worth business out of the same sector as exchanges.

This means no external execution, no external sending orders to other counterparties or outsourcing of execution. All servers and all trading environments must be in house, proprietary systems from top to bottom, and must be secured from the entirety of all other systems.

Those are the rules stipulated by the FINMA, which licenses Swiss banks, and when was the last time anyone argued with a Swiss authority on anything? That’s right, never.

Bullying often does not result in success, and in the case of our industry, we can hold our heads up high knowing that we all worked very hard and diligently to scupper the attempted consolidation of our sector by the exchanges via devious methods.

For that, we can certainly hold our heads high – however another way of looking at it could be that if brokerages take the smart route and make themselves attractive to the big boys by offering innovative entry points to very sophisticated markets, it would be a better route than churning leads and hoping for the best, as a big exit would likely be the end result.

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