ICE’s NYSE Euronext Deal Will Raise Its Game In The European Derivatives Market

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NYSE Euronext

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The IntercontinentalExchange (NYSE:ICE) and NYSE Euronext (NYSE:NYX) moved closer to completing their merger after securing the requisite approval from the Securities and Exchange Commission (SEC) last week. They now await the green light from the individual country regulators in Europe and could close the deal as soon as the first week of September. Once complete, the transaction will make the ICE-NYSE combined entity the third largest exchange operator in the world, behind Hong Kong Exchanges and Clearing, and the CME Group in that order.

With both companies’ managements confident of closing the deal soon, the two companies have already started the process for divesting businesses that don’t align with their long term focus on European derivatives. NYSE Euronext hired three banks earlier this week to coordinate the sale of Euronext and is also looking to divest its stake in MCX India. [1] [2]

We believe that the merger will provide ICE a tremendous opportunity to expand in the European derivatives market. This segment is set to grow rapidly over the next few years due to regulatory tailwinds and several leading players entering it in the hope of gaining market share. However, ICE is likely to spear ahead of these competitors once it acquired NYSE Euronext.

Currently, we do not cover ICE but plan to start doing so once its acquisition of NYSE Euronext gets completed.

See our full analysis for NYSE Euronext

Why Does The European Derivatives Market Have Huge Potential?

The financial crisis showed the urgent need for increased transparency in the derivatives market. Due to this, the G-20 nations in 2009, resolved that “all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties.” [3] Since then, regulations such as the Dodd-Frank Act in the U.S. and the European Market Infrastructure Regulation (EMIR) across the Atlantic have been forcing OTC derivatives to move to centralized clearing systems. According to the Bank for International Settlements (BIS), the $633 trillion notional amount outstanding in the global OTC derivatives market will eventually shrink by roughly 46% due to these regulatory mandates. [4] [5]

With these new regulations comes a big opportunity for derivatives exchanges around the globe. In particular, the European derivatives segment accounts for over 44% of the total outstanding volume according to some estimates, making this is a particularly attractive market. [6]

Why Is ICE Likely To Have An Advantage Over Its Competitors After It Acquires NYSE Euronext?

Given the huge potential of this segment, several leading exchange operators such as CME Group (NASDAQ:CME), NASDAQ OMX (NASDAQ:NDAQ) are looking to expand into Europe. (see: Major Exchanges Look To Seize The European Derivatives Market Opportunity)

However, we believe that all players in the market do not have an equal chance of gaining market dominance. The CME Group and NASDAQ OMX are just entering the London-based derivatives market and have the task of setting up their businesses from ground up. On the other hand, ICE will assume the role of the market leader immediately after it completes the acquisition of NYSE Euronext.

Once complete, the NYSE Euronext acquisition will add LIFFE to ICE’s armory. LIFFE (short for “London International Financial Futures and Options Exchange”) is NYSE Euronext’s international derivatives business which operates derivative markets in Amsterdam, Brussels, Lisbon, Paris and London. [7] As mentioned above, it enjoys a virtual duopoly in the European derivatives market along with the Deutsche Borse, and will immediately propel ICE into a leadership position in the European derivatives market.

Further, LIFFE’s offerings complement ICE’s clearing platform and will allow the combined entity to launch innovative contracts in multiple asset classes. This will ensure that ICE keeps flooding the market with new and innovative products in the coming years.

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  1. NYSE remains keen on MCX stake sale, FT, August 19, 2013 []
  2. ICE hires banks to advise on flotation of NYSE’s Euronext: sources, Reuters, August 21, 2013 []
  3. Non-Cleared OTC Derivatives: Their Importance to the Global Economy, ISDA, March 2013 []
  4. Statistical release: OTC derivatives statistics at end-December 2012, BIS, May 2013 []
  5. Second Consultative Document: Margin requirements for non-centrally cleared derivatives, BIS, February 2013 []
  6. The Global Derivatives Market: An Introduction, Deutsche Borse, April 2008 []
  7. SEC Filings, NYSE Euronext, 2012 []