Rolet’s deal to buy LCH set to bear fruit

Rolet’s deal to buy LCH set to bear fruit

The news broken by FOW this week that Bill Templer is set to run a new derivatives venture being set up by the London Stock Exchange Group is interesting for various reasons.

Templer is a good fit for the exchange. He knows the business inside out having worked for years as the heads of futures at UBS and Morgan Stanley and his pedigree chimes with LSE chief executive Xavier Rolet's ideas about exchanges.

Rolet worked at Goldman Sachs, Credit Suisse and lastly Lehman Brothers, before replacing Clara Furse as the head of the British exchange in 2009, stressing he wanted to reinvent the exchange, make it more dynamic and reconnect with its main clients, namely the banks themselves.

Some five years after his appointment, few could argue that he has not succeeded in these goals.

Rolet has improved and diversified the LSE business in various ways, not least the acquisition in 2012 of a majority stake in LCH.Clearnet.

But there has always been a question market over the LSE's plans in derivatives.

Initially Turquoise, the platform bought from another group of banks in 2009, was the chosen platform but the LSE back-tracked and bought out last year the remaining shares in Turquoise Derivatives it did not own and re-branded it LSE Derivatives.

Since then things have been pretty quiet though it was always a safe bet the LSE was working behind the scenes to position itself to take advantage of the new regulatory regime being ushered in under Mifid II.

The LSE has yet to go public on its plans with regards to swap futures but FOW reported this week that the exchange is in talks with various investment banks over their support for a new venture that will start trading swap futures.

The LSE's majority ownership of LCH.Clearnet, the remainder of which is held by its banking clients, could prove decisive given many exchanges, including Deutsche Boerse's Eurex and Nasdaq OMX NLX, are also reportedly working on swap futures.

LCH.Clearnet is the world's main clearing house for interest rate swaps so it is the obvious place for banks to clear swap futures because firms can benefit from huge savings by cross-margining the two correlated products against each other.

At a time when banks are struggling with capital, the ability to cut the amount of cash they are required to post up as margin to clearing houses is hugely compelling and gives the LSE a major advantage over its rivals in terms of launching a swap future platform.

A successful LSE swap future launch could put pay to its rivals' ambitions in European swap futures but it could also challenge the virtual trading monopolies of ICE's Liffe system and the German Eurex.

These exchanges dominate the short and long ends of the curve in interest rate futures trading and these franchises could also become threatened if the LSE can come up with a good story about trading and clearing both swap futures and interest rate futures under one roof.

Rolet and the LSE, unlike some of their larger rivals, have been consistently and fiercely pro-competition when it comes to the European market so it is hard to believe the LSE will look to allow its own derivatives venue to cross-margin in LCH while refusing the same access to rivals.

More likely the LSE will allow open access to LCH but will seek to ensure that its new venue is more compelling than the competition by ensuring it keeps their largest customers, namely the big investment banks, onside by tying them in with a profit share agreement.

Rolet has done many deals in just five years at the exchange but his painful and protracted acquisition of LCH.Clearnet could be the one that defines his legacy and makes the LSE a serious derivatives exchange for the first time in its history.