Western exchanges should focus on developing post-trade clearing and settlement capabilities or foster ties with emerging market players, according to a new report from PricewaterhouseCoopers (PwC).
“The difficulties encountered by bidders in several recent aborted mergers among Western exchanges have led to a number of businesses questioning their next move,” said Shamshad Ali, PwC partner. “[Traditional exchanges] will need to look closely at different models to compete against, or collaborate with, their emerging market counterparts.”
In June, a proposed merger between the London Stock Exchange (LSE) and Canadian TMX Group was rejected by shareholders, while the proposed merger between Deutsche Boerse and NYSE Euronext faces greater scrutiny by European Union (EU) regulators over competition concerns.
Alternative trading platforms, Chi-X Europe and BATS, while pressuring major exchanges as they increase market share, are also seeing delays to their proposed merger.
These transatlantic consolidations are driven by falling margins and increasing competition, while recently enacted laws such as the US Dodd-Frank Act and Europe's MiFID are revolutionising the regulatory landscape. That has led some exchanges to offer services catering to firms' needs with impending regulatory changes. Just last week, the UK Financial Services Authority announced a £15 million agreement to sell its transaction reporting system to LSE, which will migrate customers onto its own platform.
But the biggest changes will come from rules that seek to push derivatives on-exchange or through central clearing houses.
"[Trading through exchanges and the clearing houses they control] could create hugely valuable growth opportunities which may further encourage exchange groups that focus primarily on equities to bolster their derivative trading operations through acquisition," wrote PwC in its report, adding that some exchanges have sought to diversify their revenue streams to include data and post-trade services.
This value may be especially pronounced in Europe, where, in conjunction with the MiFID reforms, the European Commission published its EMIR proposals, seeking to increase OTC market stability by ensuring contracts are centrally cleared and imposing rules to establish greater levels of interoperability - a term that refers to the ability of diverse or disparate organisations to operate with each other.
Clearing house EuroCCP recently announced interoperability with BATS Europe and UBS' multi-lateral trading facility (MTF). With wider adoption, Diana Chan, CEO of EuroCCP, hopes to increase competition and lower costs for European equities trading activities.
PwC wrote: "If the EU forced clearing platforms to be more open in an effort to boost competition, specialists such as LCH.Clearnet would be better positioned to compete with the exchange silos in much the same way as MiFID allowed Chi-X and other new entrants to gain equity trading market share from the national stock exchanges."
But in terms of consolidation activity, the consultancy firm says look towards emerging markets. As economic growth continues to outstrip the traditional markets, exchanges in Asia and Latin America are positioned at the heart of the growth surge, notes Shamshad Ali, partner.
“Over the next five years, significant M&A activity will be driven from the emerging markets as local exchanges seek growth opportunities outside their home markets," he said.
The top emerging market exchanges to watch, according to PwC, are Brazil, Hong Kong, Singapore, Shanghai and the merged Russian Exchange (MICEX and RTS).
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