Examination of Witnesses (Questions 120-139)
MRS CLARA FURSE, MR MARTIN WHEATLEY AND MR JONATHAN HOWELL
TUESDAY 22 JANUARY 2002
120. The other two organisations, Euronext and Deutsche, see derivatives as very important. You are not attaching the same importance, if it happens it happens.
(Mrs Furse) No, I think that is not the right way to look at it, if I may say so. There is a big difference between the way that the derivatives markets operate in Europe and the way that they operate within the UK. One of the interesting things about the UK is that the bulk of the equity derivatives market is over the counter, in other words it is not exchange based. This is one of the reasons why Eurex has such a fantastically successful equity derivatives business because the bulk of their business takes place on exchange, that is not the case in London. What we were hoping to do in getting together with LIFFE was to draw in some of that over-the-counter business by bringing together inter-related products to draw in to the Exchange some of that over the counter business. We already do a very significant amount of business which is directly related to the equity derivatives business that goes on outside of LIFFE. It is a different model, it is a different market, it is a different structure, it operates completely differently.
121. With Deutsche having their share of the equity and Euronext now with LIFFE, is there space for you? Does it now leave you as an organisation a bit exposed as not having that sort of depth in that area?
(Mrs Furse) No. I think, obviously, on-exchange derivatives are a way of expanding our product base. That was one of the major attractions of doing a deal with LIFFE. There are other ways of developing our product base, through covered warrants for instance, which is a product that we are going to introduce later on in the year, and potentially through initiatives with other on exchange derivatives markets. We have three main product lines: broker services, which is where the derivatives would have fitted, issuer services, which is capital raising, and information services. There is great potential for all of those product lines to develop.
122. That all sounds very good and very technical and very impressive but you did want to buy LIFFE?
(Mrs Furse) Yes, absolutely.
123. So why did you want derivatives 12 months ago but now you shrug your shoulders?
(Mrs Furse) We are not saying that derivatives are not an important and developing growth market, they are. What I am saying is that our position in London is not directly comparable to the position of Deutsche Börse and Euronext because the market there operates in a different way which means to say that we are not at a relative disadvantage. What we were hoping to do was create revenue synergiesimportant revenue synergiesthrough the acquisition of LIFFE which would have drawn into the Exchange some of that over-the-counter business which in the UK is extremely significant. Of course we are still interested in derivatives. We are interested in anything that expands our product base and we are looking at ways of developing that.
124. Could I ask you to look into your crystal ball and look down the road five years. Do you think there will be one dominant securities exchange in Europe?
(Mrs Furse) I think we will still be the leading exchange organisation in Europe or in this time zone in five years' time, yes. I think we will have grown our market significantly and we will be a significantly bigger business.
125. Are you saying you will be the dominant securities exchange in Europe in five years' time?
(Mrs Furse) We are today and we will be in five years' time, yes.
126. Can you just give us your impressions over the last couple of years as to why you think that position will be maintained? What leads you, looking back over the last couple of years, to think you will be in five years' time where you are now, i.e. the dominant player?
(Mrs Furse) Because we have a very strong market serving a global equity market business, many parts of which are based in London. We see globalisation bringing more business into London, that has certainly been the trend over the last few years. I myself, in my last two jobs, was what we refer to as a global product head, in other words global management of financial services products tends to be managed out of London because the London environment is particularly favourable, so that helps us enormously. We see the development of equity markets generally in Europe as potentially a great boost to our markets. At the moment I think we only see something like 11 per cent of equity funds in Europe invested in the UK, we expect that to double in the next few years. As I have been alluding to throughout this session, we have a number of ways of expanding our business and we intend to do that from a very strong base which we have today.
127. Do you have any figures on the globalisation effect?
(Mrs Furse) I am sure we can provide them.
(Mr Wheatley) Yes.
(Mrs Furse) We would love to provide them.
128. It is predicated on London just growing and growing and growing in terms of its market share?
(Mrs Furse) And Europe growing and the markets becoming more global, in other words more sectoral rather than geographic investment.
129. That is a very strong positive benefit from globalisation in your view. That is the way it is going, apparently to the great advantage of the LSE?
(Mrs Furse) Yes and we are the most international exchange in the world. We see significantly more international trading in London than any other exchange in the world.
130. That has been the trend but you are projecting that forward without any erosion of the position. On the contrary, it is not even going to stay the same, it is going to get stronger and stronger.
(Mrs Furse) I do think it is interesting that in this last year, which has been a difficult one for global equity markets, we have performed extremely well.
131. I just wonder if it might be possible rather than you rooting around now for any figures, if we can perhaps have a note on that? That is an interesting fact.
(Mrs Furse) Yes.
132. You announced recently a decision to develop a joint agreement with settlement systems with other partners.
(Mrs Furse) With Euroclear.
(Mrs Furse) Yes.
134. Do you see that form of consolidation as being more significant for you in the future than exchange consolidation?
(Mrs Furse) I think the reason there is a lot of attention on this area and why this attention has really increased in the last year is that it has become apparent that cross border trading costs are very high and actually they are too high. If we want to achieve greater efficiency in capital markets in Europe, and we want to move towards a single market in financial services in Europe, then we do need consolidation at the settlement and clearing end. We are doing what we can to promote that and to facilitate that and that is the basis on which we are effectively putting a line into Euroclear. It is an extension of our service to customers.
135. The nature of the agreement is that it is a partnership?
(Mrs Furse) Well, is it a partnership, I suppose it is, it is a commercial decision, it is a business decision to make that access easier and cheaper for our customers.
136. Yes but all the players in the partnership retain their separate identities?
(Mr Wheatley) Yes.
(Mrs Furse) Yes, that is right.
137. Is that part of your strategy, also, that you are visualising a set of arrangements maybe in future but where you retain you separate governance structure, your separate corporate identity?
(Mrs Furse) I think that the way that we run the market in Europe clearly works for our customers and for our shareholders and therefore it is obviously in their interest that we continue to do that. In other words, we apply the standards that we apply, we have the kind of regulation that we have and certainly from our position as a company our brand is very strong and it is a great marketing advantage.
138. Is the development of a consolidated capital market in Europe one of your business objectives?
(Mrs Furse) Yes, definitely because it is clear to us that as the market becomes more efficient in Europe that is better for our customers. It should make the cost of trading, certainly the cost of clearing and settlement much cheaper and that will increase volumes. We believe it will draw more business to us in London.
139. You think there is money to be made out of that?
(Mrs Furse) Yes.