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Exchanges M&A returns as holding companies diversify



For the exchanges that run the world’s biggest and most critical financial markets, it has sometimes seemed this year’s pandemic has had little effect.

In August, Intercontinental Exchange, the US trading, clearing and data provider, announced the $11bn purchase of mortgage software group Ellie Mae.

The deal was not only the largest in ICE’s 20-year history but also signalled that mergers and acquisitions, the industry’s biggest preoccupation of recent years, were back on the table. That was underlined in November when Deutsche Börse bought a majority stake in Institutional Investor Services for €1.9bn and Nasdaq paid $2.8bn for financial crime detection software maker Verafin.

The ICE deal was one Jeffrey Sprecher, its chief executive, had been working on in the background for more than a decade, he told a virtual conference for the futures industry in mid-November. He had long sought a business reliant on US interest rates, the benchmark for vast quantities of daily trading, and the deal slotted into the company’s long-term strategy of turning musty financial services into lucrative high-tech operations.

It would allow ICE to ride the transformation of the vast US mortgage market from cumbersome paper-based systems to digital ones. “It’s very much akin to what we do in futures trading in terms of the underlying technology,” he said.


deals in the industry in 2020, surpassing last year’s 19

That bullishness was born of a confidence that the pandemic that left many businesses in limbo had not extended to the industry that owns the main exchanges, clearing houses, benchmarks and data providers behind trading on markets. The industry sailed through the crisis. Exchanges stayed open and largely withstood the deluge of deals as markets convulsed in March and April. Margin calls to meet derivatives trades were met in all but a few cases. 

For many executives and regulators, this resilience justified the push after the 2008 financial crisis to hand exchanges more responsibility for market stability. Exchanges have expanded beyond their traditional role as the host for trading, looking to take a sliver of all aspects of a trade, from supplying data and analytics to managing the risk and settling it. Electronic trading has mushroomed, as have demands for data, boosting industry profits for the last decade. Competitors find it difficult to fully replicate the complicated network of buying and selling on an exchange.

The valuations of the biggest companies rebounded to, or even surpassed, pre-pandemic levels. Companies such as ICE, MarketAxess and S&P Global, the index provider, have more than doubled in the past decade, outstripping the S&P 500 financial index and well-known financial services stalwarts such as JPMorgan, BlackRock and Goldman Sachs.

The annual value of M&A deals in the industry is the second highest on record at $21bn so far this year, behind only 2019’s total of $28bn, according to data from FactSet. Last year’s number was swelled by London Stock Exchange Group’s planned $27bn deal to purchase data and trading group Refinitiv. The 30 deals this year have surpassed last year’s total of 24, said FactSet.


LSE Group’s planned purchase of Refinitiv

Even so, the pandemic may yet have a significant impact on executives’ thinking. Trading volumes have shrunk dramatically since the market panic around the coronavirus subsided. It has exposed the stark difference in business models between those that rely on activity from trading and more diversified rivals who have extensive revenues from indices and technology. 

The share prices of CME and Cboe, reliant on market volatility, have fallen by 13 per cent and 23 per cent respectively this year. In contrast the more diversified Nasdaq has risen 18 per cent and ICE has risen 12.3 per cent, in line with the benchmark S&P 500 index.

Central banks now have near-unlimited firepower to curtail sudden price movements and eruptions on markets, which has “significant potential ramifications”, says Nicholas Watts, an analyst at Redburn in London. The banks can suppress volatility and while there may be periods of high volatility, those periods will burst through longer stretches of lower-than-average volumes, he adds.

Law firm White & Case in August forecast that M&A levels in Europe would remain high as the largest businesses sought scale, volume and diversification. “Competition between market participants for the same high-value targets is likely to intensify,” it said. Most executives and advisers accept that buying national stock exchanges is politically fraught, even as the LSE aims to sell Borsa Italiana to Euronext for €4.3bn to satisfy European competition concerns over its Refinitiv deal.

Mr Watts forecasts a steady flow of deals, large and small, in tech and data, or less technologically-advanced areas of financial institutions such as back- and middle-offices, where deals are checked and settled. “Success in weathering a major real-world stress-test in the first half of 2020 will support [exchanges’] dealings with regulators and other capital market participants,” he says.

Big-ticket deals will further concentrate the business of running capital markets among a handful of actors. At the end of 2019 total global exchange revenues were $35.6bn, according to Burton Taylor International Consulting. 

The five largest exchange holding companies — ICE, CME, LSE, Deutsche Börse, Nasdaq — had strengthened their grip on the market, accounting for 53 per cent of the total and up from 50.8 per cent in 2015, the consultancy found.

For now many antitrust regulators around the world seem to be comfortable with the trend. US watchdogs approved the LSE’s purchase of Refinitiv by arguing that rivals and customers had significant bargaining power that would limit price rises or competition. 

But the biggest hurdle for completing the LSE deal will be securing approval from authorities in Brussels. Alongside the coronavirus, that ruling, due in mid-January, may set the tone for M&A for many years to come.

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Saudis agree oil deal with Pakistan to counter Iran influence




Saudi Arabia has agreed to restart oil aid to Pakistan worth at least $1.5bn annually in July, according to officials in Islamabad, as Riyadh works to counter Iran’s influence in the region.

Riyadh demanded that Pakistan repay a $3bn loan last year after Islamabad pressured Saudi Arabia to criticise India’s nullification of Kashmir’s special status.

But the acrimony between the two longtime allies has eased after Imran Khan, the prime minister, met Saudi Crown Prince Mohammed bin Salman in May.

News of the oil deal with Pakistan comes as Saudi Arabia embarks on a diplomatic push with the US and Qatar to build a front against Iran, said analysts. Riyadh lifted a three-year blockade of Qatar in January in what experts said was an attempt to curry favour with the newly elected Joe Biden.

Pakistan had shifted closer to Saudi Arabia’s regional rivals Iran and Turkey, which, along with Malaysia, have sought to establish a Muslim bloc to rival the Saudi-led Organisation of Islamic Cooperation.

Khan has developed a strong rapport with President Recep Tayyip Erdogan, encouraging Pakistanis to watch the Turkish historical television series Dirilis Ertugrul (Ertugrul’s Resurrection) for its depiction of Islamic values.

Ali Shihabi, a Saudi commentator familiar with the leadership’s thinking, said that “bad blood” had accumulated between Riyadh and Islamabad, but recent bilateral meetings had “cleared the air” and reset relations to the extent that oil credit payments would restart soon.

A senior Pakistan government official said: “Our relations with Saudi Arabia have recovered from [a downturn] earlier. Saudi Arabia’s support will come through deferred payments [on oil] and the Saudis are looking to resume their investment plans in Pakistan.”

The Saudi offer is less than half of the previous oil facility of $3.4bn, which was put on hold when ties frayed.

But Fahad Rauf, head of equity research at Ismail Iqbal Securities in Karachi, said: “Any amount of dollars helps because time and again we face a current account crisis. And with these prices north of $70 a barrel anything helps.”

Pakistan’s foreign reserves were more than $16bn in June compared with about $7bn in 2019 before it entered its $6bn IMF programme.

Robin Mills at consultancy Qamar Energy said: “Saudi Arabia and Pakistan are allies, but their relationship has always been rocky. And the Pakistan-Iran relationship is better than you might think.”

Mills said that the timing of the Saudi gesture was “interesting” given that Iran was preparing to step up oil exports with the US considering easing sanctions.

“The Saudis are on a bridge-building mission more generally. They have sought to mend fences with the US and there is also the resumption of relations with Qatar,” he said.

Ahmed Rashid, an author of books on Afghanistan, Pakistan and the Taliban, said that there were a variety of factors that might have spurred Riyadh to restart the oil facility.

It may be “partially linked to the American need for bases” to launch counter-terrorism attacks in Afghanistan from Pakistan, he said, but added that its priority was probably to prevent Islamabad from falling under Tehran’s influence.

Rashid pointed out that Pakistan was caught between China, which has invested billions of dollars in infrastructure projects, and the US.

“Pakistan has to play it carefully, it is dependent on China for the Belt and Road, dependent on the west for loans,” said Rashi. “This is a very complex game.”

Anjli Raval in London and Simeon Kerr in Dubai

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Digital euro will protect consumer privacy, ECB executive pledges




The introduction of a digital euro would boost consumers’ privacy and protect the eurozone from the “threat” of competing cryptocurrencies that could undermine the bloc’s monetary sovereignty, according to the central banker overseeing its development.

Fabio Panetta, an executive board member at the European Central Bank, told the Financial Times that one of the project’s key aims was to combat the spread of digital coins created by other nations and companies.

“If the central bank gets involved in digital payments, privacy is going to be better protected . . . because we are not like private companies,” he said. “We have no commercial interest in storing, managing, let alone abusing, data of users.”

“Of course there is the potential threat that could come from others issuing a digital means of payment . . . If people do want to pay digitally and we do not offer them a digital means of payment, somebody [else] would do that.”

He contrasted the digital euro — an electronic version of cash issued by the central bank — with “unstable coins” such as Diem, Facebook’s planned digital currency which would let users send money as easily as text messages.

The ECB’s recent consultation on a digital euro found that people’s greatest concern was that it would erode their privacy. But Panetta said the central bank had tested ways to separate people’s identities from their payment details. “The payment will go through, but nobody in the payment chain would have access to all the information,” he said. 

The central bank has also tested “offline payments for small amounts, in which no data is recorded outside the wallets of payer and payee”, he said; transfers of up to €70 or €100 could be done using a Bluetooth link between devices. 

Chart showing expected post-pandemic payment behaviour in the eurozone

“For very small amounts, we could permit really anonymous payments, but in general, confidentiality and privacy are different from anonymity,” Panetta said, adding that some checks would be needed on most transactions to avoid money laundering, terrorism finance or tax evasion.

“A payment can be reconstructed [after the event] if the police want to assess whether there’s been any illicit activity,” he said.

Nearly two-thirds of the world’s central banks are running practical experiments on whether to launch digital currencies, according to the Bank for International Settlements.

But commercial banks worry that central bank digital currencies could erode their deposits, especially in a crisis. Morgan Stanley estimated as much as €837bn, or 8 per cent of eurozone bank deposits, could switch to digital euros.

It could also crowd out cash, some critics have argued; more than half of German households surveyed recently by the Bundesbank expressed scepticism about a digital euro and frequent cash users were the most dubious.

Panetta said a digital euro would lead to “a fundamental change in the way in which payments, the financial system and society at large will function”, for example by being “programmable” to allow automated payments, such as road tolls or in a cinema.

But he said the ECB was determined to make sure the digital euro did not undermine the commercial banking system, replace cash, crowd out innovation or become a shadow currency in smaller countries.

To achieve this, it is planning to either cap the amount anyone can hold at €3,000 each or impose “disincentivising remuneration” above that threshold, Panetta said.

The ECB’s governing council will meet next month to decide whether to push ahead with the preparations and Panetta said it could be ready for use in about five years’ time. 

The central bank will also complete its new oversight framework for private digital currencies and crypto asset providers by the end of this year, he said.

Chart showing average amount of cash in the wallet at the beginning of the day, by country

Crypto assets such as bitcoin are “very dangerous animals” that are “largely used for criminal activities” and consume “a huge amount of energy”, Panetta warned. 

So-called stablecoins such as Diem are meant to be safer as they are backed by fiat currency reserves, but Panetta said the potential volatility of those reserves created “an inherent instability in the function of these coins — and for this reason they are still unstable coins”.

Regulating and supervising crypto assets is hard “because there is no responsible legal entity,” he said. “It is decentralised. They could be in China. They could be in Switzerland or in South America . . . But to the extent that intermediaries are involved in the supply of those crypto assets, then we would have regulation and oversight in place.”

The digital euro should be made available in limited amounts for tourists visiting Europe, Panetta said, but the ECB would “have to reflect very carefully on access, and up to which limit, for foreign users”. 

Major central banks are in talks to ensure their digital currencies are kept “interoperable”, Panetta said, as this would help to “make cross-border payments more efficient and much cheaper”.

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SEC aims to stop insiders dumping stock before the bad news hits




It seems the great trading edge enjoyed by corporate insiders is knowing when to sell. That makes sense. There are many brokers and business-TV guests with stock buying tips, but few who will urge you to sell now, before the bad news comes out.

But we are probably coming to the end of a great couple of decades for legalised insider trading in America. This boom really started with a 2002 “reform”, the Securities and Exchange Commission’s adoption of Rule 10b5-1. This provided a means for senior executives or board members to sell their shares without making themselves vulnerable to charges of acting on “material non public information”.

New SEC chief Gary Gensler has called for reform of the rule, telling a Wall Street Journal conference that it led to “real cracks in our insider-trading regime”.

The rule was issued, as is customary with major reforms, in the wake of a series of giant corporate scandals — in this case those that came to light after the dotcom crash of 2000-2001. You know, pump earnings, goose the stock, dump your shares. Never again.

To qualify for protection under 10b5-1, covered insiders could no longer sell their companies’ shares at will. They have to enter into a (non-binding) contract, or plan, that instructs a third party to execute trades on their behalf according to a written plan, based on value, timing, number of shares, and so on. The stock sales under these plans would then be disclosed to the SEC and then the general public.

At the time, this seemed like a reasonable way to ensure market transparency while allowing insiders to sell shares to make tax payments, buy houses, or cover school tuition. Plans + disclosure + aligned interests = good.

In practice, Rule 10b5-1 has turned out to be a “get out of jail free” card for opportunistic timing of stock sales using insider information. It is also probably a good object lesson for why $4,000/hour lawyers are a better value than $400/hour lawyers.

To begin with, you, the insider, must follow a plan, detailed in a SEC Form 144, which you adopt at a time when you are not in possession of material non-public information. That would include, for example, certain knowledge that the next earnings announcement will be disappointing for the public shareholders.

Ah, but while you have to establish the plan with, say, your broker or family lawyer, you can modify or cancel the plan at will, in private. And you are not required to inform the SEC or the public that the plan is in place. Even better, there is no minimum number of transactions, so you can use it to make one big sale.

And you can file your plan (when you are ready) on a paper form, rather than in an easily accessed online filing. Until the pandemic, the 10b5-1s were only available for a limited time in the SEC’s Reading Room. It is possible, even likely, that an insider’s pre-filed plan might become general knowledge only after their stock sale has already been executed by his broker.

Mostly the insiders appear to be getting out before bad news is disclosed.

Daniel Taylor, a Wharton School associate professor and director of the Wharton Forensic Analytics Lab, has co-authored a series of studies on data combed from the 10b5-1 filings. He says “the sellers’ outperformance (in timing trades) comes from avoidance of risk”.

According to one of his studies, sales executed in the first 30 days of plan adoption are associated with the stocks underperforming others in their industry by 2.5 percentage points over the following six months.

Sales made 30 to 60 days after a plan adoption foreshadow 1.5 points of underperformance by the insiders’ companies. The sell-off effect was consistent over the 2016-2020 period covered by the study. The insider advantage disappears if sales are made under plans that are at least 60 days old.

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As Taylor (and others) see it, the policy lesson is clear: insiders should be required to wait for at least two months after filing their plans publicly before their stock sales can be executed. Oh, and those plans should be filed in easily accessible electronic form, so insiders’ lessened commitment to their companies becomes obvious before the bad news.

The odds favour the SEC’s adoption of such changes.

The next frontier, Taylor says, is to limit insiders’ use of privileged information about competitors, suppliers, customers and the like. That “shadow trading” is probably a bigger rip-off than insider selling.


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