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
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
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
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