Discussions around a potential stock exchange grouping of Central and Eastern European Stock Exchange Group (CEESEG) and the Warsaw Stock Exchange (WSE) continue apace, with securities industry services experts calling it the most meaningful and most likely grouping for the region.
A thought leadership paper from UniCredit Global Securities notes that the key rationale for merging infrastructure is (a) to achieve economies of scale by operating off common platforms and sharing common functions as appropriate (b) enabling a single connection with uniform messaging from and to clients across a broader range of infrastructure (c) benefitting from scale to improve the robustness of the infrastructure and (d) harmonising process including any downstream routing (e.g. CCP and CSD linkages for an Exchange).
“In addition, CCP mergers should enable reduction of collateral needs and allow harmonised collateral rules whilst larger Exchange units should be more attractive to remote members and thus improve market liquidity,” says the paper.
The paper also looks at the likelihood of potential interest from non-CEE exchanges in the region. It said “external predators are unlikely to be attracted by the smaller markets for the fixed cost (especially management time and focus) of any acquisition would be hard to recover given the low volumes of trading. Thus there could only be consideration of an acquisition of the WSE in Poland or CEESEG in Austria. Deutsche Boerse could be a candidate, said the paper, especially for the Austrian market where it has close ties.
“But it has a clearer focus on the derivative, rather than the cash, markets at the moment and, after the abortive tie up plans with NYSE Euronext, shareholders may find such small acquisitions a distraction rather than a sound strategy,” it said.
“NYSE Euronext appears more focused on its two core competences of trading and technology (with Euronext planning to move imminently onto the new UTP platform). Eastern Europe (as distinct from Western Europe or the Pacific rim) appears unlikely targets for it. However, it is the planned supplier of the UTP platform to the WSE. “Other major providers really do not have any traction with the region. Moreover, from outside the region, the paradox appears to be that the major players (we exclude Moscow as it is acquisition proof) are too small to merit the time and management cost of any transaction. However, should there be the development of a pan regional grouping, such views would change.”
The paper concluded that time will tell if it is feasible to create a merger of equals that brings the economies of scale, advantages of liquidity and value for cross listings that drive the success or failure of any such transaction “Any change will be Exchange driven and this remains a competitive area with the incursions of MTFs and similar platforms as well as the predatory IPOs and cross listings of markets such as London,”it said.
“Just as downstream development of a common CCP has been hard to achieve within CEESEG, the creation of such a vehicle across multiple markets is doubtful although loss of flow (assuming the European code is adopted and cross linkages created) could drive change fast – if it ever happens.
“The status quo is definitely not sustainable if the region wishes to ensure the efficiency of its infrastructure. But we should not forget that there has been ample dialogue over the years and change will take place in two phases spread over many years: the management agreement and creation of the structure for change (be it merger, acquisition, cooperation agreement or other; the convergence of infrastructure to reduce costs, to enable harmonisation, to improve technical latency and ensure greater market liquidity.”