The monopoly aspirations of exchanges and the CFD rulings: A cartel on the horizon?

With LSE almost ready to let LCH SA go to Euronext, the entire agenda by the listed derivatives sector to dominate in 2017 is clear

As the interbank dealers lick their wounds exchange traded options and futures are booming

This month will most certainly be remembered as a milestone in the history of the retail FX business, as it is the month in which the Financial Conduct Authority (FCA) in Britain issued a consultation paper which detailed its proposals to restrict the method by which contracts for difference (CFDs) are provided to retail customers.

The immediate result was that the share prices of some of the major CFD and spread betting firms were decimated, largely due to investor confidence being dented as a result of CFDs being a core business component for the vast majority of British companies.

Britain’s highly advanced, publicly listed CFD and spread betting companies have been in existence for the best part of three decades and are bastions of expertise, serving a very loyal and sophisticated domestic audience via high quality proprietary trading systems.

The level of expertise within the senior management of such firms is absolutely there to see and it is fair to say that the flagship companies that provide retail trading environments to discerning customer bases are the large established firms of North America and Britain, those being Hargreaves Lansdown, FXCM, OANDA Corporation, IG Group, CMC Markets, Interactive Brokers and GAIN Capital.

Investigating this in detail, FinanceFeeds stands by the opinion that the new rulings, which include leverage restrictions and various amendments to the methods by which CFDs, a core business item for many large British OTC electronic trading firms, can be provided to a domestic client base, have been brought about by a distinct amount of lobbying from the large listed derivatives venues of the world.

Indeed, during the week that the proposals were outlined by the FCA, FinanceFeeds spoke in detail to several senior industry executives in London, including at CFD firms that were in the process of examining the rulings.

The consensus was that, especially from the viewpoint of those with extensive institutional level experience, that the idea of making proposals aimed at decimating the core business activities of many OTC firms that have been established for the best part of 30 years and have impeccable copybooks has an ulterior motive.

The large British CFD firms have a long history of client loyalty, with the vast majority of their customer base being based in Britain. These are the pinnacles of Britain’s highly regarded, ethically operated financial and electronic trading business, all of which should be respected for their operational exactness right the way from their development of specialist proprietary trading platforms to suit their audience, and led by astute and experienced industry leaders who understand this industry inside out and are of the highest caliber.

Why does the FCA not put a stop to the binary options scammers that are allowed to run amok in Britain, whereas other nations across the globe have restrained them effectively?  Why does the FCA stick to its bizarre perspective of upholding 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.

There is a school of thought which is absolutely plausible that many regulatory authorities in regions with a large electronic trading industry have an agenda in which they are setting in place a procedure in order to have the entire OTC FX and OTC derivatives migrated to an exchange model.

Quite poignantly, this was one very important comment to consider:

This is not a consolidation in my view, it is an attempt to move the non-bank retail FX business globally to a different model. The exchanges have woken up to the fact that a large part of their retail businesses has moved off exchange and they want to get the business back. Scandals in the OTC industry, bankruptcies related to SNB type events and binary options scammers have given ample justifications to exchange lobbyists to argue against the OTC retail industry. In the end who do you think has more clout with the FCA? The LSE or IG markets ? It is obvious who is going to win. ” – Francois Nembrini, Global Head of Sales & Liquidity Management at AFX Group’s QuanticAM

Part of the aspirations toward generating a listed derivatives monopoly it appears is to decimate the values of the OTC business and move it all onto exchange, via regulatory posturing as well as creating targets for acquisition or divestment by shareholders to the point that the business that was taken by the highly successful OTC brokerages can be mopped up by the exchanges.

Today, the wrangling between London Stock Exchange and the European Commission’s government level concerns about the creation of a monopoly should the $21 billion deal proceed in which Deutsche Boerse and London Stock Exchange merge.

Today, London Stock Exchange Group has entered exclusive discussions with rival Euronext over the sale of its French clearing business.

The deal to sell LCH SA could be crucial to the success of the London Stock Exchange’s mega-merger with Deutsche Boerse.

The London Stock Exchange announced in September that it was exploring the sale of LCH SA in anticipation of concerns around clearing from the EU competition regulator.

This is a clever move as it allows the two listed derivatives venues to merge whilst satisfying EU anti-competition criteria, yet still empowers the overall exchange traded derivatives industry.

FinanceFeeds has been privy to information during the course of the proposals to merge the two venues that as a result of research by the European Commission, a merger would create the world’s largest margin pool with a value of 150 billion euros, therefore could impede competition for smaller trading venues that rely on LCH.Clearnet as well as other firms that offer similar collateral settlement services.

On that basis, London Stock Exchange’s response was to make a quick attempt to sell LCH SA in order to address proactively any anti-trust concerns. LCH Group which holds the European subsidiary LCH SA is 57% owned by the London Stock Exchange, with the remainder being owned by other users of the service.

It is ironic that the concerns of Lord Myners and other senior London officials with lifelong careers in the exchange traded derivatives sector in the largest financial center in the world were ignored by Germany, and that it has taken a report by the anti-business and staunch socialist European Commission whose interests are anti-British to stifle a potentially harmful merger which would have placed the control one of London’s fine institutions in Frankfurt, which is absolutely nowhere on the world’s financial markets and electronic trading stage.

The desperation that has now come about has been sensed by Euronext, which is one of the key suitors for the purchase of LCH SA, for which London Stock Exchange wants £430 million, and has to sell it in order to put paid to the investigation into any potential anti-competitive nature of the proposed deal, and quite frankly to just get on with it.

In late October, JPMorgan Cazenove was enlisted to oversee the sale of LCH SA, and all looked set to head to market and find a suitable acquirer, with Euronext being in the lead because it contributes around half of the revenue of LCH SA in clearing business from France, Holland, Portugal and Belgium.

Euronext appears to realize its position of strength in that it is strategically and operationally the most suitable acquiring party, and the shortlist of alternatives that would buy LCH SA is dwindling, however, Euronext has made it clear that it will not pay one penny for LCH SA.

Therefore, even if this deal goes ahead and is not a cash transaction (the terms have not been agreed yet) it would not matter if LCH SA was given to Euronext for free, as it would remove the one obstacle that is in the way of London Stock Exchange and Deutsche Boerse creating a massive margin pool whilst their perceived moves toward lobbying the FCA to restrict the core business activities of OTC participants makes for an effortless sweep in which the entire business can be moved to their books.

Deutsche Boerse has had OTC FX in its sights for some time, one example being the acquisition by Deutsche Boerse in July 2015 of FX trading platform 360T for $796 million.

FinanceFeeds is also aware that 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.

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 last week, whereby Deutsche Börse will pay a US dollar amount in the single digit million range.

Thus, this interest is quite clearly part of the overall strategy, and with the sale of LCH SA to one Euronext which serves the purpose of removing the EU concerns about monopolies, yet serves to empower the listed derivatives industry just as much as if it was retained, the strategy is laid out for the year ahead.


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