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
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
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
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.
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
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
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
"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,
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
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
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
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
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
Bertrand said there was interest from some London-based
clients who are not trading the index derivatives on Nasdaq OMX
at the moment.
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
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
He believes the offerings complement each other well because
RTS mainly offers index derivatives and EDX mainly share
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
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".