London Stock Exchange and OM announced today that they are to develop and provide derivatives market services specifically tailored for equity market participants through the creation of a new international equity derivatives business, EDX London.
OM says that EDX London aims to combine the strength of the London Stock Exchange’s global equity market offering and expertise, with OM’s technology and experience in equity derivatives. Initially, EDX London’s business will be built around the Scandinavian equity derivatives business of OM’s London subsidiary, OM London Exchange. EDX London will take responsibility for the operation of this business, expand the product range and seek to create new business lines.
Part of EDX London’s initial focus will be on the development, in conjunction with the London Clearing House (LCH) – owners, among other things, of SwapClear – of an over-the-counter (OTC) equity derivatives trade confirmation and clearing service for wholesale market participants. Such a facility is not currently available for OTC equity derivatives business in London, and discussions with LCH on its delivery are already in progress. Once completed, it is expected to deliver capital and operational savings to clients. OM says it will be developed in close collaboration with market participants.
EDX London will join a broad trading community, comprising the existing memberships of Stockholmsbrsen, London Stock Exchange and the Scandinavian exchanges that are already linked to OM London Exchange. In addition to OM London Exchange’s 84 member firms, London Stock Exchange’s 292 member firms will be provided with access to EDX London.
EDX London will use OM’s CLICK(TM) exchange technology platform together with OM’s SECUR(TM) clearing technology platform. Separately, an agreement has been reached for London Stock Exchange to use OM’s CLICK(TM) to enhance the growth of its recently launched covered warrants market by providing additional IT systems flexibility and scalability.
EDX London joins a client roster at OM that now includes the American Stock Exchange, Athens Derivatives Exchange, the Australian Stock Exchange, Borsa Italiana, Hong Kong Exchanges and Clearing, the International Securities Exchange in New York and the SFE Corporation in Sydney).
In due course, says OM, EDX London will seek to build on the order-book sharing arrangements which OM London Exchange already has in place, in co- operation with a number of other markets. From the outset, the network will consist of EDX London and Stockholmsbrsen, Oslo Brs and Copenhagen Stock Exchange, members of the NOREX Alliance.
“This initiative with OM represents an important business opportunity for the Exchange,” says Clara Furse, Chief Executive of London Stock Exchange, which was of course subject to a takeover bid from OM. “In collaboration with OM and LCH, we will be providing the growing equity derivatives markets in London with new products and services, which will reduce risk and cost. We are pleased to be associated with OM’s highly-regarded derivatives technology and expertise, and look forward to being able to develop an international equity derivatives market around their network of clients.”
Per E. Larsson, President and CEO of OM, added: “The formation of EDX London together with London Stock Exchange, Europe’s leading equity exchange, creates an exciting opportunity for OM. EDX London underpins our shared vision of further expanding a network of markets on a common technology platform, providing key synergies to customers as well as exchange partners.”
EDX London will pay OM a consideration of 24 million for the transfer of the equity derivatives business of OM London Exchange. London Stock Exchange will hold a 76 per cent controlling stake in the new company with OM holding a 24 per cent interest. The earnings effect following the creation of EDX London is expected to be broadly earnings neutral, in operating terms, for both parties.
Subject to approval as a Recognised Investment Exchange by the Financial Services Authority, EDX London intends to begin trading in the second quarter of 2003.
OM has estimated the financial effects of the creation of EDX London. The company says EDX London will pay approximately SEK 340m (24m) in cash to OM as consideration for the transfer of OM London Exchange’s equity derivatives business. OM and London Stock Exchange will in proportion to its holdings capitalise EDX London. For OM, the net income effect from the transaction is expected to be approximately SEK 190m (13.6m) in 2003. In addition to OM receiving future earnings from its 24 per cent ownership in EDX London, Stockholmsbrsen will according to the agreement receive an annual contribution from EDX London’s future revenues from Swedish derivatives.
Assuming the same revenue and cost levels for OM London Exchange’s equity derivatives business as in 2002, the effect on OM’s operating earnings is expected to be neutral following the creation of EDX London. This includes the annual contribution from EDX London’s future revenues from Swedish derivatives, and excludes the result from the transaction as well as revenue effects from OM’s technology operations following systems sale and facility management services to EDX London and London Stock Exchange.