In a year that has seen the emergence of CME Group (formerly the Chicago Mercantile Exchange and its cross-town rival, the Chicago Board of Trade) as the global behemoth it always seemed destined to become, as well as the merger of the International Securities Exchange (ISE) into Germany’s Eurex, it’s easy to overlook scores of smaller deals between big and small exchanges that are re-shaping the global exchange landscape and bringing more and more products to our fingertips.
Nowhere is this more apparent than in the growing linkages between exchanges in emerging and established markets.
Take for example CME’s impending swap of 2% of its shares for 10% of the Brazilian Mercantile and Futures Exchange (BM&F). The two exchanges have long been rivals on the soybean front, but the share swap means BM&F products will be listed on Globex starting in the second half of 2008.
The move will give American traders access to a gaggle of products previously out of sight and mostly out of mind – although, admittedly, not technically out of reach. And that’s just the beginning.
NYSE.Euronext, the equities monster straddling the Atlantic alongside Nasdaq OMX (which only began the tedious task of coming into existence at the end of last year) recently paid $90 million for 1% of Bovespa, which owns the São Paulo Stock Exchange, which in turn has links to all of Brazil’s other stock exchanges.
Anyone who has been following European exchange consolidation will recognize the pattern: OMX emerged through the clumping together of eight exchanges in different jurisdictions, and Euronext through the clumping together of five. Now it’s happening on a global scale.
And, of course, there’s the New York Mercantile Exchange (Nymex), which has a struggling but viable operation in Dubai and owns a piece of an electronic communications network (ECN) called Marco Polo Network. This nifty operation, which also counts the World Bank among its owners, connects exchanges from Mexico to Malaysia. Nymex says it will leverage its relationship with Marco Polo to launch futures on 20 Latin American products over the next 18 months.
Which brings up the strangeness of bedfellows in this odd new world: Nymex already lists some of its products on CME’s Globex platform, and at press time is still negotiating its possible acquisition by CME.
And everyone, it seems, is getting a piece of India, whose markets are still walled off from retail traders abroad. At press time, however, it’s not clear they will be able to keep them, thanks to changes to the rules governing foreign ownership of Indian commodities exchanges that prevent any single non-Indian entity from owning more than 5% of any Indian exchange (which Fidelity, Goldman Sachs, and Intercontinental Exchange already do).
And let’s not even mention the emergence of sovereign wealth funds as big buyers of financial assets. These entities, owned by governments in oil-rich states and China, have bought about $70 billion worth of western banking assets over the past year, including stakes in exchanges like Nasdaq OMX.
The long-awaited backlash is finally beginning, with the European Commission and the Bush administration backing an effort by the International Monetary Fund to develop a voluntary code of conduct for these opaque and deep-pocketed operators.
And speaking of commissions and administrations: the world’s regulators are going global in a big way as well.
The U.S. Securities and Exchange Commission (SEC) looks set to adopt a policy of mutual recognition towards non-U.S. regulators, which would give Americans the same access to global securities that the bulk of the free world already has to ours and to each other’s.
Serious talks on bilateral agreements between the SEC and European Union regulators began in February while on the futures front the Commodity Futures Trading Commission and the China Securities Regulatory Commission agreed in February to really hunker down and deal with cross-border transactions, a prelude to the opening of Chinese markets.
Also in February, the SEC hosted its first “Emerging Markets Conclave” with heads of securities regulators from Brazil, China, South Africa and South Korea.
But the really weird stuff on the regulatory front is happening only within Europe, where the fungibility of futures contracts is implied in the European Union’s Markets in Financial Instruments Directive (MiFID). It comes as the U.S. Department of Justice is questioning the ownership of clearing houses by exchanges, and although MiFID doesn’t forbid ownership of clearing houses by exchanges, it does mandate best execution in such a way that could lead to mandatory fungibility of futures or “futures-like products,” at least for institutional investors.
The mandate is vague, and contains a slew of opt-out clauses, but that hasn’t stopped a consortium of European banks from announcing the launch of something called “Project Rainbow,” which is designed to give NYSE Euronext’s Euronext.Liffe subsidiary a run for its money in short-term interest rate products. The scheme echoes Project Turquoise, a seven-bank project designed to give European equities houses a run for their money. But this is the same debacle that has been dubbed “Project Tortoise” after being delayed ad infinitum. The communal operation seems to be facing the same management boondoggles that exchanges did before tossing the membership structure.
Perhaps all of this futuristic talk is just that. Let’s not forget that the much-ballyhooed move by exchanges into credit derivatives still hasn’t taken place. Other than the CME’s 2005 acquisition of SwapStream and ICE’s 2007 acquisition of Chatham Partners, all the significant action in this sector has been cash players buying other cash players. But there is some evidence that the sentiment of fungibility, or at least competition among platforms, is taking root. Two deals announced in the past month give institutions the option of going on-exchange or over-the-counter (OTC): specifically, Nasdaq OMX’s impending investment in Agora-X and NYSE Euronext’s impending link to SuperDerivatives. Agora-X is developing an ECN for over-the-counter commodities, while SuperDerivatives prices options. Things are getting peculiar on the technology front as well. Take recent news that an Indian exchange has begun outsourcing its IT needs to Scandinavians, an especially odd development when you consider that the Indian exchange in question is the new Indian Energy Exchange (IEX), which is being launched by Financial Technologies (FTIL). These are the same people who brought us the Multi-Commodity Exchange of India (MCX), which runs on a much-touted Windows-based platform that was seen to be the great rival to OMX’s platforms in emerging markets. The Scandinavian partner in this deal is none other than OMX – raising the question of whether these rivals are also in bed together, and whether their offspring will be viable entities.
