Taking on the big boys - Nicolas Bertrand interview

Taking on the big boys - Nicolas Bertrand interview

Since Nicolas Bertrand started his new job as the London Stock Exchange Group’s head of equity and derivatives markets on January 1, he has been working on the LSE’s ambitious plans to expand its derivatives business.

Six months after he was promoted, Bertrand is keen to talk about these plans and his vision for the business.

At the moment, the LSE’s derivatives offering is split into two distinct markets, EDX London and the Italian Derivatives Exchange Market, which came with the acquisition of Borsa Italiana in 2007. Bertrand knows Idem very well, having previously run that market, as well as LSE’s equity trading.

The two markets have, to a large extent, been run as separate entities so far. But they will be integrated once Idem migrates to the Sola trading platform that EDX licensed from TMX Group at the end of 2009. The system switchover is planned to take place in October, but there is no exact date yet. (See ‘Milan: the ideal derivatives community?’, to be published tomorrow)

EDX and Idem will then be managed on a single trading platform. The aim is to make it easier for clients to access products on both exchanges, as they will no longer need to adapt their trading systems.

“We have a network of pipes across the two markets so it’s possible for us to very easily manage connectivity from one market to the other,” says Bertrand.

Having a single offering would also look better in league tables and would show how the business was faring as a whole, in relation to rivals such as Eurex and Liffe.

Though their products will be listed on the same platform, EDX and Idem will still remain distinct in some respects – members of one exchange will not automatically become members of the other and the markets will remain separate from a regulatory standpoint. The link between the two exchanges is subject to regulatory approval, as are the new contracts the exchange plans to list.

Going continental

Combining the two exchanges is not the only exciting thing happening at LSE. The company also hopes the combination will be a good platform from which to expand its product listings, with the aim of eventually creating a pan-European offering.

These ambitious growth plans were unveiled in June when Xavier Rolet, chief executive, announced to an audience of listed derivatives professionals that the LSE wanted to offer a continent-wide range of futures and options to rival those of Eurex and NYSE Euronext.

The first stage will be to list single stock futures for international shares on Idem, whose 150 equity futures and options so far only cover Italian companies. The aim is to base the new instruments on stocks listed on the LSE, Euronext and Deutsche Börse.

Though the LSE has not yet finalised the plan, the new products will mainly be based on French, Dutch, German and eventually Spanish stocks.

The exchange will be selective about which stocks it chooses in the first phase. “We’re not going to offer the full, complete universe in one go on EDX or Idem. That’s probably a longer term view, a second step,” says Bertrand.

But entering this highly competitive market will be no easy ride. When Rolet announced his “modest” plans at the IDX London conference, Garry Jones, global head of derivatives at NYSE Liffe, said LSE had “a lot to be modest about”.

Bertrand admits creating a new European equity derivatives market would be a challenge, and says that if it were an easy thing to do, it would have been done already. But he thinks the move is possible.

“We have a pretty wide network of clients when you look at the sum of Idem and EDX together,” he says. “We definitely have all the major players in the industry, especially when you talk about market making.”

Bertrand says two market makers are interested in the pan-European products. He thinks market interest, along with a plan to lower the cost of clearing, will enable the LSE to be competitive.

“We’re trying to establish ourselves as the third derivatives exchange in Europe,” he says. “We need to increase our size and increase our product offering in order to be able to compete.”

But although Europe is the main focus for the exchange and Rolet first referred to the derivatives platform as pan-European, Bertrand prefers to call it international. “We shouldn’t limit ourselves to Europe,” he says. “Otherwise it would be a bit backward-looking.”

He wants the LSE’s derivatives market to be an international market, as the London Stock Exchange is for equities. “We’ve got relationships all over the globe, we’ve got listings worldwide, so it this that can be leveraged and brought into the derivatives picture,” he says.

Step by step

The derivatives expansion will take place in several stages. Bertrand said the exchange was starting with “a more targeted, client-focused approach”.

The LSE, Bertrand emphasises, does not want merely to replicate other exchanges’ products. Though some of its contracts will mimic those of other exchanges, it also wants to develop new product lines.

“Our intention is to contribute positively and bring new products in the market that cater to the interest of the international customer base that we have,” he says.

Although he acknowledges that the exchange must develop its customer base, Bertrand is also confident that it already has a substantial customer base, so will not have to make an enormous effort to do that.

Cutting the cost of clearing, the LSE believes, could be the way to give it a competitive edge.

Bertrand also wants to bring in cross-margining between equities and derivatives. This already exists between Idem and Borsa Italiana, but, according to Bertrand, not at any other derivatives exchange in Europe.

If the LSE can do this, it could create big margin efficiencies for those who are hedging or arbitraging and who are margined twice on what is almost a flat position. Bertrand thinks this move is important because it will make sure that markets are better arbitraged between each other.

At any rate, the pace is going to be demanding. LSE wants to launch international stock futures by the end of this year. It may happen before or after the migration to the Sola platform — the exact timing will depend on when the exchange feels is the right moment for its clients.

The products will be launched over a few months or quarters, so that relationships with market makers can be built and interest from market participants garnered for each product.

Though EDX is not yet ready to announce a list of the new products it is planning, one launch on the horizon in Italy is a volatility index based on the FTSE Mib Index, the main benchmark for the Italian equity market, which tracks the 40 most liquid Italian shares.

Idem hopes to start publishing the volatility index in the final quarter of 2010, then list an option on it later. Bertrand said the move made sense because there had recently been an increase in trading of FTSE Mib Options.

Realism on Nordic products

The excitement surrounding LSE’s plans has been somewhat dampened by the almost total loss of EDX’s Nordic derivatives business at the end of last year, which has had a drastic impact on the company’s revenues.

In December 2009 a longstanding, but recently unhappy, cooperation deal between EDX and Nasdaq OMX came to an end (see ‘Fire in the north,’ FOi March 30, 2010). EDX lost the right to offer derivatives on the OMXS 30 Index of Swedish stocks and on Swedish single stocks listed on the Stockholm Stock Exchange, now owned by Nasdaq OMX.

Bertrand said losing the Nordic business was the “expected consequence of the end of the link” with Nasdaq OMX.

EDX has had to start again from zero. It immediately replaced the Nasdaq OMX indices with its own suite of lookalike FTSE indices cover Denmark, Sweden and Finland – but they have not been popular, as firms are used to trading the Nasdaq products and most important players are members of that exchange.

Bertrand is optimistic that the exchange will win back some of the lost trading, but concedes that EDX is unlikely to regain its former market share in the near future. His aim for the moment is to achieve between a 5% and 10% share of the Nordic market by March next year.

In May and June, some trading began in Swedish derivatives. A total of 366 contracts were traded during the two month period, which an exchange spokesperson described as “a humble start to beginning to compete against an established market”.

Bertrand said there was interest from some London-based clients who are not trading the index derivatives on Nasdaq OMX at the moment.

Russian growth

More encouraging for EDX has been its Russian business, which is going strong. EDX’s Russian order book makes up a significant amount of its trading at the moment — a total of 13.9m contracts were traded between January and May this year, 24% more than in the same period last year.

The two tier structure of the Russian market, with equity derivatives offered both in Moscow by Russian Trading System Stock Exchange and Moscow Interbank Currency Exchange, and offshore at EDX, has prompted some market participants to wish for these markets to be brought together, or at least, for better links between them (see Russian Equity Derivatives Roundtable, FOi homepage).

Bertrand said EDX’s door was open to an agreement with RTS. “There are things that we can provide that will enrich the main market,” he says. “You should not see the Russian derivatives markets and EDX in antagonism but look at how EDX is positively contributing to make a better market for Russia.”

He believes the offerings complement each other well because RTS mainly offers index derivatives and EDX mainly share options.

In the past, he said, EDX had taken steps to enter into an agreement with RTS. But this had not been revisited recently, according to Bertrand, though he hopes it will be done in future.

EDX still only has one market maker for its Russian derivatives, Deutsche Bank, but is “working at increasing the liquidity on the market both on screen and off screen”.

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