Memorandum submitted by HM Treasury
1. The Committee has asked for a memorandum from the Treasury prior to conducting a hearing on 22 January concerning the takeover of the London International Financial Futures and Options Exchange (LIFFE).
2. The Financial Services Authority is the body directly responsible for regulating LIFFE as a recognised investment exchange under the FSMA. The Treasury is responsible for the general framework of regulation and the relevant legislation, the Financial Services and Markets Act (FSMA).
3. In 2001 LIFFE received bids from a number of parties including Euronext N.V. Its Board unanimously recommended approval of the bid by Euronext N.V. On 21 December 2001, the Secretary of State for Trade and Industry, in accordance with a recommendation of the Director General of Fair Trading, decided not to refer the bid for LIFFE to the Competition Commission. The FSA considers that LIFFE continues to comply with the requirements for being a recognised investment exchange. On 8 January 2002, Euronext announced that, having received valid acceptances of the offer from over 90 per cent of LIFFE's shares to which the offer related, it intended to give notice to those LIFFE shareholders who had not yet accepted the offer that it would compulsorily acquire their LIFFE shares.
4. LIFFE was set up in 1982. It provides a platform for trading futures (an agreement to buy or sell sometime in the future at a price specified at the time the deal is done) and options (the right, but not the obligation, to buy or sell at a fixed price before or on a certain date in the future) contracts. The contracts traded relate to short-term interest rates, government bonds, equities (including equity indices), swaps and commodities.
5. There are two main reasons for trading in futures and options: hedging and speculation. Hedging means individuals or companies protecting themselves against future price changes in a particular product. Buying futures and options allows them to manage the risk associated with price changes. Speculation means individuals or companies hoping to profit from future price changes. This helps to provide liquidity to the market by increasing the number of deals being done.
6. LIFFE is a public company. Its strategy and consequential decisions about offers from other companies are commercial matters, subject to complying with the regulatory and competition policy framework. They are for the Board and shareholders of LIFFE to decide upon in the light of what they think makes the most sense in respect of shareholder value, serving their customers and developing the business.
7. London's position as a leading international financial centre is partly based on its openness which has stimulated competition and innovation. It makes a substantial contribution to the UK's economy as a whole, accounting for around 2.5 per cent of UK GDP. The Government wants to play its role in ensuring that the City of London maintains its position as a leading international financial centre through supporting the City's competitiveness. To do this it has put in place a macroeconomic framework to promote economic stability in the UK. This has been complemented by reform of regulation of the financial services sector to ensure a regulatory environment, which maintains confidence in UK financial markets and encourages innovation. More widely the Government has also updated competition policy and worked to ensure that the UK labour market continues to encourage job creation.
15 January 2002