Director of post-trade services ● London Stock Exchange Group
“I am a plumber,” says Kevin Milne. “I plug things together, and make them work. That is what I do. And in this business the plumbing does not seem right. I have no vested interest. I do not have to protect the decisions I made 10 years ago. I have nothing to defend, and no axe to grind either way. I just want it to be better. If that means I have to ask lots of awkward questions, then I will do that. Hopefully, at the end of it, we have a better result.” It is obvious that, by appointing Milne as director of post-trade services in January this year, London Stock Exchange (LSE) Chief Executive Xavier Rolet was not looking for more of the same. For Milne, on the other hand, the role is something of a homecoming. His career in the securities industry began at the LSE in 1986. But it is only something of a return, for the exchange today is quite transformed from the one he left in 1991. Just 2 years after he left, the exchange effectively exited the post-trade space after its proposed TAURUS settlement system collapsed in ignominy. Four years after that, Milne himself, then at Thomson ESG, extinguished the last of the post-trade capabilities of the LSE by acquiring its Sequal trade matching system. In the front office, meanwhile, the LSE was chastened by series of experiences at least as embarrassing as TAURUS. It let LIFFE fall to Euronext, embarked on a failed alliance with Deutsche Börse, followed by botched bids not only from the Germans but from Americans, French, Australians and even inter-dealer brokers. Staff and functions shrank steadily, while MTFs ate into its equity market share. Fifteen years after Milne left Throgmorton Street, the LSE was an object of pity and scorn. So when he was first approached about working in post-trade services at the LSE, it is not surprising that Milne asked himself, “Why would I ever want to do that?” It was not until he spoke to Rolet and his colleagues, and listened to their explanation of the problems and opportunities they faced, that Milne recognized his entire career was the perfect preparation for the job they were inviting him to take.
That career now dates back nearly 25 years to the months before and after the Big Bang of October 1986, when the London securities markets were in the ferment that followed the decision by the LSE to abolish fixed commissions and the division of labor between agents and principals, and open its membership to investment banks. At the time the decision was made in the summer of 1983, Milne knew more about big tackles than big bangs. He was an aspiring rugby player, who looked to fit work around sport rather than sport around work, but he was astute enough to know a gold rush when he saw one. “I would love to have been a professional rugby player,” says Milne. “But there were two problems. One, in the 1980s it was not a professional sport. Two, I was nowhere near good enough.” That is not what people who knew Milne in his playing days say, but what is incontrovertible is that hegaveitupforajobattheLSE.By1986he had been at work for 8 years already, so he was no ingénue. His working life had actually begun in 1980 as a 18-year-old trainee at the Leamington Spa operation of the Ford Motor Company. He did not last long. In fact, by the time he joined the LSE he had tried a wide variety of occupations without settling on any distinct career path. The fact he took a pay cut to join the exchange was really a sign that he was getting serious about work for the first time. His initial task was in the information services division, then led by George Hayter, which managed the electronic distribution of price and listed company data to LSE customers. Later, Milne worked on Project Fast Track, which led eventually to the development of Sequal. What stood out was his eagerness and willingness to learn, which led to varied work and rapid promotion.
It was a happy period. Mark Tarsey, the man who actually recruited Milne to the LSE, is still an occasional golf partner as well as a supplier of executive training services to companies where Milne has worked over the last 20 years. “We were probably the only overtly customer-facing people working at the exchange,” recalls Milne. “We ended up talking to everybody about anything and everything, from doling out tea and sympathy to people who missed talking to their chums on the floor to making sure the TOPIC screens and the telephones worked. It was a lot of fun, and I learned a tremendous amount. Every time there was a course, I put my hand up. I did a ridiculous amount of courses. It was a time when organizations felt they had an obligation to take people in, and train them, coach them and develop them, rather than just buy the skills in. I learned more in the 5 years I spent at the LSE between 1986 and 1991 than I had learned in the whole of my life before.” One of the things he had learned was that he did not want to chart the course taken by most recruits of his type, and become a broker or a sales-trader. Another lesson, gleaned chiefly from multiple encounters with customers and their issues, which gave him an appetite for problem-solving, was that he would like to run something. The LSE of the early 1990s, which for all its virtues remained both hierarchical and bureaucratic, was not the place for an ambitious young man with a yen for being in charge. So Milne took a job with the systems division of Extel, the suppliers of financial information to the markets, then owned by United Newspapers. It proved a seminal decision, for Extel owned an investment accounting service bureau that the company was trying to reinvent as a software application and was in the process of being sold. Though he did not make a great success of that task, he did enough to impress one of the potential bidders. It was a company called Thomson.
“I spoke to Thomson and they said, ‘We did not really like your business, but we quite liked you,'” recalls Milne. He joined the company, with a brief to rationalize and upgrade their asset management software businesses outside of the US, including the legendary Portia system that is still used by a surprisingly large number of fund managers in London. But Milne quickly worked out that the real excitement lay elsewhere within the organization, in the electronic trade confirmation (ETC) group that eventually morphed into the Thomson Electronic Settlements Group (Thomson ESG). The battle to control ETC, created by the initial refusal of SWIFT to admit fund managers as members, was one of the defining contests of the 1990s. Milne stayed with Thomson ESG, reporting to fellow Global Custodian Legend Howard Edelstein, for the next 7 years. Together, they not only defeated the Sequal service offered by the LSE but saw off the rival plan of the ill-fated Global Straight Through Processing Association (GSTPA). The crowning triumph was the bold decision to merge successfully with the trade matching arm of the Depository Trust and Clearing Corporation (DTCC) to create what is now Omgeo. That long and testing experience, in which a commercial competitor effectively defeated two user-owned and usergoverned and user-financed alternatives that appeared to have invincible advantages, convinced Milne that time spent with customers is never wasted. “What was special about Thomson ESG was the level of customer engagement,” he says. “The customers did not own us, but they did feel engaged. They were very involved in shaping products through advisory boards, and we genuinely listened to them.” Initially, Milne expected to stay at Omgeo, but once ambitious plans to develop a presence in non-regulated markets were scrapped and the business retrenched after 9/11, Milne headed for the exit.
There followed a frustrating period at the private equity-backed Macgregor, now part of ITG but then selling to buy-side firms an order management system the firm had acquired with the purchase of Merrin. Milne was asked to develop the Macgregor and Merrin businesses internationally in preparation for a sale of the merged entities, but buyers prepared to pay a price sufficiently tempting for the shareholders proved hard to find. Milne stayed for 2 years, 3 fewer than it took to sell Macgregor to ITG in 2005. Milne put the interlude down to experience (“It was quite fun, and took me into the front office and electronic trading for the first time,” he says) and took a new job running the international side of SS&C. Then NASDAQ-listed, but later taken private by Carlyle before going public again in March this year, SS&C provided an unstable home. The 2 years he spent with the company were less than happy, and after leaving the company Milne decided to take some time out of the market altogether. On the advice of fellow Global Custodian Legend Terry McCaughey, Milne let it be known that he was retiring. “I got the e-mails back saying, ‘Of course you have not retired, where are you going?'” recalls Milne. “After a while, when you have not said where you are going, people realize you really are not going anywhere, and they say, ‘Would you mind taking a look at this?’ or ‘Can you help me with this?'” For a time, Milne found well-paid consultancy work advising private equity companies looking for acquisitions, software companies and executive search firms. But such work never suits the temperament that values doing over advising, and in February 2007 Milne agreed to become chief executive of ICMA Limited, the market services arm of the International Capital Markets Association (ICMA), which supplied trade matching, regulatory reporting and fixed income instrument pricing and database services to members of the euro-markets trade association.
The chief attraction of the position, says Milne, was that it looked hard, and it was. “It was part trade association, part regulator, part market service operator, part technology company, part information company,” says Milne. “It had an ownership that was not that keen on owning it, a business model that was way out of date, an organizational culture that was wrong and technology that was horrible. Like many organizations that have had the same leadership for a long time, it had also grown stale.” The broader challenge was to reengage with clients that had grown cynical, and reenergize staff whose talents were undervalued, but it was hard to make progress with an ownership and governance structure that set large clients against small ones and different nationalities against each other, and which required even trivial decisions to be ratified by a general meeting of all the members, which took place but once a year. “The governance did not lend itself to taking any type of risk, or to taking decisions quickly, especially if they were complicated,” explains Milne. It was obvious to Milne that the business needed a change of ownership, but it proved hard to persuade all of the members of the idea, since those who thought ICMA should not be in the market services business were outweighed by those who thought it was a core source of revenue or a valuable means of cross-subsidization. But Milne proved persuasive in the end. He changed the management, upgraded the technology and spun the trade matching, regulatory reporting and data services supplied by ICMA Limited into a new division rebranded as Xtrakter. The business was sold to Euroclear in November 2008, in a deal Milne says realized value and reduced risk for the existing owners, preserved jobs, and retained the clients without undermining the user-owned and user-governed structure. Though Euroclear would gladly have retained Milne-perhaps even asked him to fill their soon-to-be-vacant CEO slot-it was fairly obvious that the slow-moving culture of the Brussels-based ICSD would not have suited him, especially in the face of the overwhelming strategic challenges it faces. After a transitional period that absorbed most of 2009, he was free to explore other opportunities. He agreed to join the LSE just before Christmas last year.
What appealed was the opportunity to reshape an industry in flux. “Everything is up in the air at the moment,” explains Milne. “The roles of exchanges, clearing houses, depositories, ICSDs, banks and custodians is up in the air, and each is going to fall in a completely different order from the old world. I left the first discussion with Xavier thinking, ‘These guys have got a real chance of doing something extraordinary.'” One reason behind that buoyant reaction is easy to identify. The fact that the LSE was prepared even to consider appointing to a senior position a man whose commercial personality was forged at Thomson ESG in its most buccaneering years was itself a measure of the scale of the cultural change in progress at the exchange. But there were other reasons for Milne to react positively. Throughout its travails in the 1990s and the early part of the 21st Century, the LSE remained a great brand, fit to compare with the stock exchanges of New York and Tokyo. It is still one of the great institutions of one of the great financial centers of the world. Today, having acquired Borsa Italiana in 2007, and under a dynamic new CEO in the person of Xavier Rolet, a dangerous sports fanatic and former investment banker with Goldman Sachs and Lehman Brothers, the LSE is in a more confident and commercial mood than at any time since the 1980s. As a former customer of the exchange, and a sometime board member at Euronext, Rolet understands how much larger a role the exchange could play. He is backed by a board that is now more supportive of an expansive strategy. The thinning of the serried ranks of middle management has also created a more agile organization, and one prepared to make bold moves, including acquisitions. Even the share price has revived from the lows it touched in the spring of last year. “The atmosphere here is very different now, thanks in large part to the change of leadership,” says Milne. “The exchange has spent most of the last 8 or 10 years in defensive mode, fending off hostile bids. That does create a bunker mentality. It is easy to see why it became very inward-looking. But we are through that period now, and it is all about the growth story.”
But what exactly is the post-trade growth story at the LSE? It lost control of what happens to its trades after they are struck a decade and a half ago, following grotesque mismanagement of the TAURUS project, when the creation of a modern CSD for the London equity market had to be taken over by the Bank of England, which built CREST. The sale to Thomson of the Sequal electronic trade confirmation platform in 1997 marked the final exit of the old LSE from the post-trade environment. If it interacted with the post-trade infrastructure at all over the next 10 years, it was via the proxy of its somewhat testy relationship with LCH.Clearnet as the would-be monopoly provider of clearing services to the users of the exchange. What has changed, of course, is that Borsa Italiana is now part of the group. That acquisition has brought to LSE not only a central counter-party clearing house (Cassa di Compensazione e Garanzia, or CC&G) and a CSD (Monte Titoli) but a domestic Italian issuer services group that organizes, manages and reports AGMs for listed companies. Milne is charged with working out how to grow these businesses, in terms of size, geography and asset classes. An obvious strategy is simply to plug the post-trade gaps, where they exist, in terms of each asset class-by expanding an existing service, building a new one, partnering with a third party or even acquiring another company. “There is so much to do here,” says Milne. “When you settle in, and drill beneath the verbiage, you realize how big the challenge and the opportunity is. The scale of the change required is huge.” Luckily, the new director of post-trade services is not only free to lavish energy on the task-he expects this to be his last executive post-but can call on several hundred staff in London, Milan and Rome to help him. Better still, he says, is the in-house IT support. “If we decide to build something, we now have a rapid redeployment ability to fill the gaps,” says Milne. This is a reference to one of the first acquisitions made by the LSE: the Colombo-based technology vendor Millennium IT. It has equipped the group with more than 500 systems specialists with experience of building securities trading, clearing and settlement platforms around the world. “It gives us a huge advantage in terms of speed to market,” says Milne. “In this industry, large infrastructure projects have an extremely poor track record, in terms of keeping to time and budget. Millennium IT gives us the ability to build things quickly, smartly, on time and on budget.”
But Milne is careful to point out that his brief is not simply to make the post-trade services more comprehensive or harder working. “Post-trade is a very important space,” he says. “If you do not get it right, it makes your trading platforms uncompetitive.” Milne is also conscious that clearing and settlement must never again be an obstacle to innovation on the trading side of the business. “We need to keep the post-trade architecture ahead of the trading markets, making sure the plumbing is in place, so that when a new market comes in, we are good to go,” he says. “That enables the markets to operate at the pace they want to.” In fact, Milne reckons his biggest challenge is to ensure that the clearing and settlement infrastructure keeps pace with the astonishing pace of change at the trading level, where the closed national stock exchanges that existed when he first joined the industry have given way to multiple electronic trading platforms and crossing networks and “dark pools” accessed by DMA and algorithms, and where high-frequency traders have supplanted market makers as the chief source of short-term liquidity. “Over the last 10 years the price of trading, in terms of commissions, spreads and membership fees, has collapsed,” says Milne. “Clearing and settlement costs have not declined at anything like the same rate. If we want our markets to remain competitive, we need to get those costs down, and our service providers need to work with us in delivering that. And we will want to take control of more parts of the post-trade process if we cannot get the efficiencies through an external relationship. It is counterintuitive that the plumbing should end up costing more than the house. We need to redress that balance.” So a secondary brief for Milne is to rationalize the post-trade processes of themultitude of trading platforms controlled by the LSE Group, each of which still has its own post-trade processes.
But there is a third aspect to the job. LSE is a major customer of infrastructural providers that it does not operate or control, such as LCH.Clearnet and Euroclear United Kingdom. “We need to make sure that those relationships work for us,” explains Milne. “We need to share with them both our own hopes, dreams, plans and aspirations, and those of our customers, and make sure they are aware of where we are going and what we are doing, and what our business imperatives are-so they can align their own business plans with what we and our customers want to do. There are still a lot of moving parts in the post-trade chain, and if we are going to get low-cost, highly secure clearing and settlement processing, it has got to feel joined up. It cannot feel fragmented, as it does at the moment, or continue to be so expensive.” The jumbled division of labor between the trading, clearing and settlement service providers is one source of that fragmentation that Milne is pondering afresh. “This part of the market has not changed for years,” he says. “Clearers still do what clearers do, and depositories do what depositories do. Most of the models are still legacy.” As the dominant trading platform in the UK and Italian equities markets, the LSE group is intrinsically rich in potential for higher rates of netting, which is currently carried out at the level of the CCPs and in the UK by the depository. Milne wonders if this is optimal. “Why should a CCP do netting?” he asks. “They only want to do netting so they can perform their CCP functions. They do not need to do the netting themselves. If netting takes place higher up the value chain, you can net more transactions than happen to be passing through a particular CCP. Also, the nearer to the point of trade, the quicker a transaction can be netted, and the more efficiently it can be netted. Maybe there is a good explanation as to why netting needs to be done at the CCP level. I am happy to be proved wrong. But one of the nice things about coming in to something completely new is that you can ask all the stupid questions, and occasionally people will turn round and say, ‘Yes, you are right. It does not have to be done that way.’ In clearing and settlement there is so much opinion, and so much opposing opinion, that at least one person has to be wrong. They cannot both be right.”
This does not mean that the LSE Group is pursuing an ultra-verticalist strategy, Milne is at pains to point out. He uses a motorway metaphor to explain the “openness” of the LSE strategy. “We need to give people and markets choice,” says Milne. “We cannot operate vertical silos, in which a trade idea goes in at the top, and a completed trade comes out the bottom, and users cannot get out of the silo once they are in it or into the silo unless they joined it at the top. That is clearly not a smart thing to do. Our approach is analogous to building a motorway. Joining a motorway means taking the fastest, most secure, most efficient, lowest-cost way of getting from A to B. It does not mean you cannot get off and take a more scenic route if you wish. Similarly, if other people want to join the motorway at later stages, they can. We want to create such a compelling value proposition that people want to stay on the motorway. We donotwanttobuildaverticalsilo.”Theseare not merely pious thoughts. The Italian market has enjoyed vertical integration for 20 years, but retains an open architecture, with CC&G clearing trades on MTFs that compete with Borsa Italiana, and Monte Titoli settling them. “The Italian model, although it is highly integrated from a technology and process point of view, is open,” says Milne. “It is not vertical silo, just vertically integrated. So you can trade on MTS, clear your trades in CC&G and settle them in Monte Titoli. But equally you can trade on EDX in London, clear the trades on CC&G and send them for settlement to depositories other than Monte Titoli. But if you want to trade something on Borsa Italiana, clear it through CC&G and settle in Monte Titoli, it has got to be cheaper to do that. Platform sharing lowers your costs.” This does mean that LSE Group strategy will ensure that there is always a strong economic incentive to trade, clear and settle through the vertical construct, but Milne does not see this as fatal to competition, because there are reasons other than price to use different trading platforms, CCPs and CSDs. He points out that trades on MTS, which LSE controls, already clear in LCH.Clearnet and settle at Euroclear France.
But Milne is well aware that the future shape of the European clearing and settlement infrastructure will not be decided by commercial considerations alone. The T2S project launched by the European Central Bank has potentially massive implications for all of the CSDs of Europe, including Monte Titoli. The bulk of the revenue of the CSDs derives from settling transactions. The volumes they settle, already cut by the interpolation of CCPs, will fall further once T2S is in place. CSDs such as Monte Titoli face the prospect of being obliged to deliver other services (such as corporate actions notifications and proxy voting messages) without the revenues to support them. Simultaneously, a long debate on how to achieve interoperability between the CCPs of Europe has yet to be resolved, not least because regulators are anxious about the counter-party risks it creates. The technical workings of interoperability, in terms of standardizing business practices, default fund procedures and margin requirements across markets and asset classes, are not yielding readily to proponents of interoperability. “Interoperability is difficult, because there is a clash between the means and the desired outcome,” says Milne. “Each side has a cost base. Becoming interoperable adds to the cost base of each side. Yet the customers expect interoperability to drive down their costs. It would be fine if both sides were making 90 per cent margins, but infrastructural entities are not making huge margins any more. Their cost bases are very high, and they are finding it difficult to bring them down quickly. Few have any experience of cost-cutting, and some are based in jurisdictions where it is difficult to reduce head-count. They also have significant technology costs. So interoperability is a good idea, but it is easy to see how it might create a bigger problem than the one it is designed to solve.” As he also points out, inter-operability matters more to the new CCPs (which see it as a way to gain market share) than the incumbents (which see it as a guaranteed method of raising costs and losing clients).
Then there is the specter of regulation, which the post-trade strategy of LSE Group cannot ignore either. Indeed, it is hard to think of a time when politicians, regulators and central bankers were more interested in the structure, quality and risks of securities market infrastructures. “Although on the face of it, our responsibilities are straightforward-we are a listed company, answerable to our shareholders-there are a lot of stakeholders in what we do,” admits Milne. The combination of effective choice and a relatively finite group of actual and potential customers will oblige LSE to stay close to its users, for fear they defect to a competitor. But LSE must also contend with the reality that central bankers, regulators and trade associations believe they too are part-owners of the market infrastructure. Counter-intuitively, perhaps, Milne reckons his commercial background means he is well-equipped to cope with this constraint. “Historically, the exchange has not been very good at engaging with its customers,” he says. “It never explained the strategic context of a decision. So all the customers saw was the decision, not why it was made. The more you explain your decisions, the more comfortable the customers become. To play well in the quasipolitical regulatory space, the commercial disciplines I grew up with-lots of communication, lots of transparency and lots of talking to people, and explaining to people what you are trying to do and why-are actually very effective. It means you do not come across as saying, ‘We know best.’ So we are doing a lot of genuine consultation with the customers. And the customers are very open and very receptive. They like the idea of what we are doing, and would like to know more.” This approach to the business, says Milne, is set by Xavier Rolet, who himself sees interaction with customers as the most important aspect of his job. Milne jokes that this makes it hard for the two of them to meet other than by telephone, since they are both out meeting customers all the time. “LSE is all about customers, and stakeholder management now,” he says. “There is a romantic aspect to me coming back here, and there is symmetry to my career starting and ending here. But I do not feel like I have come back to the London Stock Exchange. I feel like I have joined a new company.” –DSH