Yearbook 2014 Perspectives on the global markets

Supporting Talking Settlement, the new wave Turquoise the next frontier

Page 24 Page 42 Page 68 ONE PLACE DIVERSIFYING Qatar. Where growth and diversification go hand in hand. Thanks to its world class regulation and a secure and transparent rule of law, the QFC has helped Qatar to become the region’s most dynamic economy, and its perfect access point. The QFC can help you be a part of it. Benefit from the lowest tax in the world,* 100% ownership, repatriation of all profits and an onshore trading environment. Join us. www.qfc.com.qa BUSINESS ENERGY LONDON STOCK EXCHANGE GROUP EDITORIAL BOARD Marketing Director Guy Brindle Senior Press Officer Tom Gilbert Marketing Manager Lauren Crawley-Moore

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©2014. By making this communication, none of London Stock Exchange Group plc and/or its group undertakings (which shall be construed in accordance with section 1161 of the Companies Act 2006) (“LSEG”), Barker Brooks Communications Ltd (“Barker Brooks”), or the individual authors intend to invite or induce you to engage in any investment activity for the purposes of the UK regulatory regime (other than, where relevant, in respect of the London Stock Exchange plc’s exempt activities of operating UK regulated investment exchanges and providing clearing services in the UK). This publication does not constitute an offer to buy or sell, or a solicitation of an offer to sell, any securities, or the solicitation of a proxy, by any person in any jurisdiction in which such an offer or solicitation is not authorised, or in which the person making such an offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such an offer or solicitation. Information in this publication may or may not have been prepared by LSEG, Barker Brooks, or the individual authors, but is made without any responsibility on the part of LSEG, Barker Brooks and the individual authors. None of LSEG, Barker Brooks, or the individual authors accept responsibility for any errors, omissions, or inaccurate information. All information in this document is provided “as is” without warranty of any kind. None of LSEG, Barker Brooks, nor the individual authors make any representations and disclaim to the extent permitted by law all express, implied and statutory warranties of any kind in relation to this publication, including warranties as to accuracy, timeliness, completeness, performance or fitness for a particular purpose. No action should be taken or omitted to be taken in reliance upon information in this publication. None of LSEG, Barker Brooks, or the individual authors accept any liability for the results of any action taken or omitted on the basis of the information in this communication. The information in this publication is not offered as advice on any particular matter and must not be treated as a substitute for specific advice. In particular, information in this publication does not constitute legal, tax, regulatory, professional, financial or investment advice. Advice from a suitably qualified professional should always be sought in relation to any particular matter or circumstances. Third-party advertisements are clearly labelled as such. None of LSEG, Barker Brooks, or the individual authors endorse or are responsible for the content of any third party advertisement in this publication or otherwise. AIM, London Stock Exchange, the London Stock Exchange coat of arms device are registered trade marks of London Stock Exchange plc. FTSE is a registered trade mark of subsidiaries of London Stock Exchange Group plc and is used by FTSE International Limited under licence. Other logos, organisations and company names referred to may be the trade marks of their respective owners. No part of these trademarks, or any other trademark owned by LSEG can be used, reproduced or transmitted in any form without express written consent by the owner of the trademark. 4 Foreword London Stock Exchange Group plc Yearbook 2014

As our evolution “continues, so our core functions – facilitating the raising and allocation of capital, matching buyers with sellers, and providing access to funding – remain evergreen.

Chris Gibson-Smith Chairman London Stock Exchange Group plc Yearbook 2014 Foreword 5 Section 1 Overview

Foreword Raising Finance

WELCOME TO LONDON STOCK EXCHANGE GROUP’S ANNUAL Section 2 YEARBOOK. THE LAST FEW YEARS HAVE SEEN A RAPID

EVOLUTION OF THE GROUP, BUT I’M STRUCK, READING THIS YEAR’S BOOK, HOW DEEPLY TRANSFORMATIVE THIS PROCESS HAS BEEN. WE ARE TODAY AN INTERNATIONAL, MULTI-ASSET, MULTI-

PLATFORM BUSINESS; A LONG WAY FROM OUR NOT-SO-DISTANT Trading on our Markets ROLE AS A STANDALONE UK EQUITIES EXCHANGE. Section 3 he most notable recent development has green shoots in the IPO market, in Italy as well as been the acquisition of a majority stake in the UK, are plainly in evidence.

T LCH. Clearnet, a leading global clearing house, which completed in May 2013 with the overwhelming Nowhere is that truer than amongst Small and support of both sets of shareholders. The strategic Medium Sized Enterprises (SMEs). Supporting rationale for this partnership is clear, and delivers the long term development of the whole funding many of our goals, but most specifically that of ecosystem, particularly for SMEs, remains a passion developing our post trade business. The transaction for us and is a central tenet of our corporate is a key step towards securing the Group’s long responsibility approach. It is our deeply held term role in the operation of international capital conviction that only when smaller, fast-growing

markets and delivers opportunities for further global businesses can efficiently access equity finance Section 4 Post Trade expansion, particularly in the United States and Asia. – private and public – as the means to fuel their growth, will we see sustained economic prosperity.

The traditional notion of the Group as a domestic Our commitment to this cause is evidenced by UK equities business is now truly outdated. The the package of programmes we have developed to Group now generates well over 50 per cent of its support SMEs across Europe. We have also warmly total income outside the UK, with employees in welcomed recent moves by the UK Government, in more than a dozen countries. That geographic particular, to create an environment to support the Capital Markets Technology diversity is matched by the makeup of the Group’s country’s most promising businesses, including revenue. Today, a third of revenues are generated policies to help facilitate increased investment. by post trade services and a similar share by

our FTSE and Information Services division. Our The Group supports the long-term health of our Section 5 Capital Markets division, which even just five economies and the communities in which we years ago was the source of over half the Group’s are proud to operate. Our charitable foundation,

revenue, now represents ‘just’ a quarter. It too has The London Stock Exchange Group Foundation, undergone its own diversification with Turquoise, established in 2010, is the basis for long-term our pan-European equity trading platform, and partnership between the Group, our employees MTS, our fixed income trading service, continuing and the charitable organisations we support. The to display strong growth profiles and expanding Foundation has so far raised over £2.5 million and Regulation and Governance geographic reach. we are committed to its long-term success.

As our evolution continues, so our core functions We hope you enjoy reading our Yearbook and – facilitating the raising and allocation of capital, learning more about our business. Section 6 matching buyers with sellers, and providing access to funding – remain evergreen. Though the lingering Chris Gibson-Smith effects of the financial crisis continue to be felt, Chairman 6 Contents London Stock Exchange Group plc Yearbook 2014

Contents

09 15 39

SECTION 1: SECTION 2: SECTION 3: OVERVIEW RAISING TRADING ON FINANCE OUR MARKETS

London Stock Exchange Group sits at the heart Supporting growing business and helping London Stock Exchange Group’s systems provide of world financial markets. With a history that companies to access international finance is fast and efficient trading, giving investors and dates back to 1801, the Group has changed core to London Stock Exchange Group. Primary institutions access to a full range of securities dramatically over the years but it remains markets in London and Milan provide companies from equities to depositary receipts, ETFs and committed to the principles that shaped it as a and other issuers of equity and debt with access bonds. Innovative new products and indices are business three hundred years ago. to some of the world’s deepest and most liquid providing growth whilst changing regulation pools of capital. The launch of new initiatives provides opportunity for new markets. and routes to market like the ELITE programme and the High Growth Segment allow the Group to continue to work closely with companies, advisors and the investment community to help create thriving capital markets.

Our word is our bond 10 Delivering long-term growth 16 All change for derivatives 40 Out of Africa 19 Talking Turquoise 42 Supporting the new wave 24 ETPs 44 Tech savvy 27 Innovation by FTSE 48 The rise of the retail bond 30 MTS: 25 years of expertise 52 A luxury experience 33 Private investor, public markets 55 London Stock Exchange Group plc Yearbook 2014 Contents 7 Section 1 Overview

61 75 91 Raising Finance Section 2

Trading on our Markets Section 3 SECTION 4: SECTION 5: SECTION 6: POST TRADE CAPITAL MARKETS REGULATION AND TECHNOLOGY GOVERNANCE

Post Trade services are crucial to the future New functionality, speed and efficiency are Robust governance plays a central role in London of the securities trading industry as clearing driving technology developments in capital Stock Exchange Group’s markets and is key to houses become a key risk management tool markets technology. The Group’s technology the on-going success and stability of capital

for trading firms, with their role set to expand services provide high speed trading platforms, markets in the UK. Section 4 significantly over the coming years. The Group real time market data and infrastructure Post Trade offers open-access and efficient clearing, products to its own markets and a wide range of settlement and custody services supporting cash customers around the world. equity, derivative, commodity and fixed income markets. Capital Markets Technology Section 5

The mechanics of post trade 62 MillenniumIT: delivering speed, Good governance, good markets 92

It’s all becoming clear 65 stability and success 77 Settlement, the next frontier 68 Innovation highway 82 Meeting the regulatory challenge 70 A new gateway 86 Regulation and Governance Section 6

Section 1 Overview 10 Section 1 London Stock Exchange Group plc Yearbook 2014

Our word is our bond

LONDON STOCK EXCHANGE GROUP HAS EVOLVED DRAMATICALLY OVER THE PAST THREE HUNDRED YEARS. BUT THE PRINCIPLES THAT GUIDED THE BUSINESS FROM THE BEGINNING STILL HOLD TRUE TODAY. HELEN POWER REPORTS.

ondon Stock Exchange Group (LSEG) is a cutting- “We are encapsulated by our motto, ‘Dictum Meum edge financial infrastructure company, built on Pactum’. It is a fantastic motto – if I went out and hired L foundations that stretch back for centuries. some expensive consultants, I couldn’t come up with a better one,” says Rolet. Tracing its roots to 1698, when John Castaing began listing stock and commodity prices at Jonathan’s coffee house in “Integrity for us being a service provider starts with the City, London Stock Exchange evolved throughout the neutrality. It’s imperative that we treat all our clients the 18th century. But in 1801, it began inviting members to join same, from governments to tiny investors to investment LSEG has on a formal subscription basis. banks.” dramatically extended its reach, diversifying This was the first regulated exchange in London, designed Hand in hand with integrity goes partnership with across fixed income to service the embryonic equities market of a burgeoning stakeholders, which has heavily influenced recent trading, clearing and British Empire. It soon acquired a reputation as a trusted strategic changes at LSEG. post-trade services, expert in global markets and became a cornerstone of the information and IT. world’s financial architecture. “Partnership, again, is not simply a culture we picked out Yet its core values – of a marketing hat. It’s important because fundamentally integrity, partnership In the intervening two centuries, the Group has dramatically we are an infrastructure company, so we are not here to with customers, extended its reach, diversifying across fixed income trading, help ourselves. We succeed if we are well aligned with our innovation and clearing and post-trade services, information and IT. stakeholders,” says Rolet. excellent service – remain fundamentally Yet its core values – integrity, partnership with customers, At a time when financial institutions face heavy criticism unchanged. innovation and excellent service – remain fundamentally for the self-serving behaviour that exacerbated the credit unchanged from the days when its traders wore top hat and crisis, this philosophy is particularly apposite. tails to work. “It has never been more important to ensure that we LSEG Chief Executive Xavier Rolet says his overriding priority listen to and provide a proper service for our partners and is to uphold those values as the Group continues to expand stakeholders,” says Rolet. geographically and build out its service lines. This belief has steered LSEG to call publicly for increased “When the global build-out started to get real traction we competition between infrastructure providers. The focus realised it was important to ensure that we were instilling on service was also the driving force behind LSEG’s move our values as we were building a platform. Unless we also towards an innovative open access model, which allows had a culture that we could offer to customers, shareholders, customers to use only the elements of its offering they employees, regulators – a continued set of values – what want instead of buying expensive bundled services. would be the point in expanding for its own sake?” he asks. “We decided to switch to open access because that way Integrity and partnership we are clearly aligned with the interests of our The first philosophical tenet – integrity – is what made the stakeholders. There is no other major exchange or reputation of London Stock Exchange and inspired its motto, infrastructure group in the world that pursues this “My Word is My Bond.” strategy,” says Mr Rolet. Section 1 Overview 11 Overview Integrity isIntegrity thewhat made of reputation Stock London andExchange its motto, inspired Dictum Meum – My Pactum is My Word Bond. “ Innovation and growth Innovation and ethical the only practical open access remains Rolet For exchanges. option for – by regulators “Whether or not open access is endorsed is moving towards – the world hoping it will be and we are access an open economy based on open and often free age of the internet, the notion that In the to information. a silo, company can build itself up as an infrastructure of the future,” is not the way access to products, restricting he says. through could feed Open access and other LSEG innovations economy. to a stuttering real society been what helps human has always “Innovation of theget out of the ditch on the odd occasion the gears Rolet. argues anymore,” economic system don’t seem to work Africa at the way can give that boost. Look “Infrastructure in terms of mobile payments, the world has leap-frogged to the next generation, enabling them to move straight of capital intensive telecoms of years hundreds saving of low cost access is what makes The provision investment. economy and an old between a successful the difference style economy.” “What we want is the equivalent of being allowed to travel of being allowed to travel equivalent is the “What we want flying Chicago to Ulan Batar, on a single plane ticket from without any penalties. We airlines different or four three bundle them – we of services, but we do not a range offer can which our clients menu from to be an a la carte want want pick and choose the services that they need and us.” from benefits. cost significant has had unbundling customers, For LSEG shareholders has also been good for But the strategy as the cost base has been grown have because revenues and highly priced contracts a few from away re-engineered client base. smaller deals with a diversified towards 1698 John Castaing The year that stock and began listing prices at commodity house Jonathan’s coffee Stock in the City. London Exchange evolved the 18th century. throughout 2014 plc Yearbook Group Stock Exchange London 12 Section 1 London Stock Exchange Group plc Yearbook 2014

We decided to switch “to open access because that way we are clearly aligned with the interests of stakeholders. There is no other major exchange or infrastructure group in the world that pursues this strategy.

Xavier Rolet CEO, London Stock Exchange Group London Stock Exchange Group plc Yearbook 2014 Overview 13 Section 1 Overview

Europe has become accustomed to “substituting debt for equity finance and relying on it to bridge the gap in terms of its diminishing competitiveness. Now we need to create an eco-system that is richer in options.

A new eco-system borrow from individual small investors, rather than cash- Despite LSEG’s diversification, capital raising is and will strapped banks. remain a core function of the Group. In London Stock Exchange and Borsa Italiana, LSEG owns and operates a But Rolet argues fundamental action is still needed by vital mechanism that could, with the help of economic policymakers. policy, allow companies and investors to kick-start Europe’s struggling economy. “The alignment between equity investors and entrepreneurs is missing and we need to urgently remove “Europe is a somewhat old-fashioned continent and has the shackles that have been imposed on other types been struggling for the last 80 years to find its place of financing – risk financing, equity financing. This is in a dynamic new world. It has become accustomed particularly the case with regards to the financing of to substituting debt for equity finance and relying start-ups, small and medium-sized enterprises, technology on it to bridge the gap in terms of its diminishing companies which we need to create jobs,” he says. competitiveness,” says Rolet. “There are trillions of euros sitting in bank accounts with “Now we need to create an eco-system that is richer in no velocity. Meanwhile, you have an army of innovative options. Bank lending is a very effective way of providing entrepreneurs, scientists and innovators who want to create finance, particularly for larger companies – but we need businesses and they have millions of potential customers. other choices. Here we are collaborating with others as part What is wrong with that picture? Our mantra here is that of a broader financial shift.” the 23 million SMEs in the EU are the solution to the problem of the 26 million unemployed people in the EU.” LSEG has already helped to recalibrate the financial system. In creating a retail bond market in London, the As the founding members of London Stock Exchange would Order Book for Retail Bonds (ORB), LSEG has extended surely agree, LSEG’s old values could yet offer the solution companies’ financing options by allowing them to to some very modern problems. n

Section 2 Raising Finance 16 Section 2 London Stock Exchange Group plc Yearbook 2014

Delivering long-term growth

WHEN COMPANIES CONSIDER HOW BEST TO EXPAND THEIR BUSINESS, THEY ARE FACED WITH A NUMBER OF OPTIONS. BUT LISTING ON LONDON STOCK EXCHANGE CAN PROVIDE THE MOST REWARDING LONG-TERM SOLUTION, AS HEATHER CONNON EXPLAINS.

ne of the most important decisions a says Raffaele Jerusalmi, Executive Director, Capital Investors are company has to make is how to finance Markets at London Stock Exchange Group (LSEG). now feeling more O growth. There are a number of options, such confident about as debt or private equity funding. But for long-term Changing climate the future of the expansion equity is an appealing choice, either via an For the last five or six years, volatile stock markets economy and so are Initial Public Offering (IPO) or a secondary issue. mean that those who bought shares in an IPO have more keen to invest too often been able to pick up the same shares more capital in IPOs,” says There are many advantages of a stock market listing. cheaply after the flotation. In recent months, however, Raffaele Jerusalmi, Unlike debt, equity does not have to be repaid and, more and more IPOs have traded above their offer price. Executive Director, while investors will eventually want to see dividends, “Investors are now feeling more confident about the Capital Markets they are willing to forgo income when the company is future of the economy and so are more keen to invest at London Stock growing rapidly or goes through a difficult patch. capital in IPOs,” says Jerusalmi. Exchange Group. Private equity backers need to realise their investment That, in turn, is feeding corporate confidence, suggesting after a number of years but share capital is permanent. 2014 will be an active year for IPOs if the global Family-owned companies can take advantage of a public economy continues its gradual recovery. IPO activity in listing to resolve succession issues, while publicly-traded London focused mainly on UK companies in 2013, as UK shares can help companies attract and motivate staff. A economic recovery was more advanced than elsewhere listing also gives companies a certain kudos with other in Europe. From a long-term perspective however, stakeholders, such as suppliers and customers. And, London remains one of the most attractive destinations having secured a share quotation, companies then have for international listings, with a large pool of investors, the option of raising more capital through a secondary highly developed financial markets and a world-leading issue, or of using their shares to make acquisitions.

Public equity is highly attractive to investors as well, offering an ideal way to tap into the growth of specific companies and thence the broader economy, both domestic and international. £7.15bn It is therefore good news for ambitious companies that the IPO climate is warming after a difficult few years. The Royal Mail Group flotation in the autumn of 2013 was one of the largest and most successful The amount raised through since the start of the financial crisis with investors subscribing for seven times as many shares as were 44 IPO’s on London Stock available. International companies are also returning to the London market. Exchange from January to April 2014 “The pipeline of companies considering a stock market flotation is looking healthier than it has for some time,” London Stock Exchange Group plc Yearbook 2014 Raising Finance 17 Raising Finance Section 2

London remains one of the most attractive “destinations for international listings, with a large pool of investors, highly developed financial markets and a world-leading regulatory regime. It also has the advantage of operating in an internationally-accepted language.

regulatory regime. It also has the advantage of operating “A public company requires a degree of transparency in an internationally-accepted language. and engagement in the public arena which most private companies will not have been used to,” says Alexander “London is among the two or three venues which Justham, CEO of London Stock Exchange. international companies will consider, whether for their primary listing or as a dual listing,” says Jerusalmi. “They will need to put in place the disclosure and The Milan bourse, by contrast, is more domestically governance requirements of the public market, to focussed with IPOs largely drawn from within Italy. ensure that they act in the best interests of the wider Both exchanges, however, benefit from a common shareholder community. The benefit of putting these platform, shared technology and the robust listing structures in place is that it gives companies the ability standards employed across LSEG. to raise public capital relatively easily and relatively frequently.” Planning for an IPO is not, however, something that companies should undertake lightly: it requires careful Public companies also benefit from brokers, analysts and planning and detailed preparation by management investment institutions following their shares, recommending and advisers. them and purchasing them on behalf of clients. 18 Section 2 London Stock Exchange Group plc Yearbook 2014

Help at hand Equity is the main form of To help up-and-coming businesses, LSEG engages with “ those who are pondering a listing. The Group’s Primary long-term capital, when Markets team spends considerable time marketing the attractions of IPOs at roadshows and seminars a company is looking to across the UK and abroad. Discussions are also held with chief executives and chief financial officers worldwide; and Justham says London Stock Exchange grow, it offers a solid base has a “long list” of possible flotation candidates. It is always though a neutral player in the process. Its role on which to finance that is to explain the mechanics of listing, the governance requirements and other such necessities. To help expansion. It provides with the IPO process itself, companies engage their own brokers and advisers. Some firms worry that the the ultimate stability of process will be lengthy and cumbersome. But such capital a company concerns can be overdone. “Some companies come to the market relatively can have. quickly,” says Justham. Businesses that have already been in private equity ownership for example, may already have the governance, reporting and transparency structures in place so they can satisfy the listing requirements comparatively easily. Others need longer to put the building blocks in place.

There is however a variety of options for firms considering a listing in London. On AIM the trading history and disclosure requirements are more relaxed than on the Main Market. And a listing on the Main Market can be either Standard or Premium; the latter adds the UK’s super-equivalent rules, which are higher than the EU minimum, to the European listing code, while a Standard listing is available to those companies, from any domicile, who prefer to comply with the EU minimum requirements.

LSEG has recently introduced a new category. The High Growth Segment is designed to help mid-sized European companies access equity finance to fund their growth.

“Equity is the main form of long-term capital,” Justham adds. “When a company is looking to grow, it offers a solid base on which to finance that expansion. It provides the ultimate stability of capital a company can have.” n London Stock Exchange Group plc Yearbook 2014 Raising Finance 19

Out of Africa Raising Finance

LONDON STOCK EXCHANGE ATTRACTS COMPANIES FROM ACROSS Section 2 THE GLOBE AND IT HAS A CONNECTION WITH AFRICA THAT

STRETCHES BACK FOR DECADES. NOW, AS ECONOMIC GROWTH IN AFRICA CONTINUES TO OUTSTRIP MUCH OF THE WORLD, MORE AND MORE AFRICAN FIRMS ARE LISTING IN LONDON.

ongolia, Singapore, Nigeria, Vietnam, Macedonia, There are a large number of funds with experience of Estonia, Bangladesh, Fiji and Belize: it reads like overseas companies and there is also a deep pool of M an extract from the United Nations, or a travel analysts to draw upon for every sector of business. No other guide to exotic destinations. In fact, it is just a few of the market can offer the same level of expertise,” he says. countries that are represented on London Stock Exchange. This is likely to translate into another busy year ahead for The list goes on – in total, 700 companies from 70 different international listings in London, with an “active pipeline of nations have chosen London to list their shares, attracted companies from all sectors lining up to list”, says Edwards. by the prestige and profile of a quote on London Stock Exchange and the unrivalled access to capital it offers. African companies are particularly well represented in London and the links with the vast continent date back to One of the big draws of London is the expertise offered the 1930s, when the first African company listed its shares by market participants, says Jon Edwards, Deputy Head in London. That was African Explosives & Industries, which of Primary Markets, Emerging Markets at London Stock made blasting explosives and detonators for the gold and Exchange Group (LSEG). diamond mining industries in South Africa. Now called AECI, it is still listed in London today. “London is a very attractive market for international firms, particularly from emerging economies. Companies from Many more African companies have made the same Asia, Russia and Africa are all very well understood here. journey to London since then. 20 Section 2 London Stock Exchange Group plc Yearbook 2014 Section 2 Raising Finance 21 Finance Raising The tale of Africa and London Stock Africa and London The tale of a for has been intertwined Exchange familiar very are long time. We very business is done in Africa with the way risks, and the the so we understand of the continent. rewards, “ 2014 plc Yearbook Group Stock Exchange London 22 Section 2 London Stock Exchange Group plc Yearbook 2014

IN NUMBERS Linked in “The story of Africa and London Stock Exchange has been intertwined for a very long time. We are very familiar with the way business is done in Africa so we understand the risks, and the rewards, of the continent,” says Ibukun Adebayo, Head of Equity Primary Markets, Africa and India at LSEG. 700 The number of international “We have an ecosystem here that can adequately price the risks of doing business companies from 70 different in different regions. London is famous as the global financial centre with the most nations that have chosen to come balanced regulatory system. There is no other regime that is as comprehensive and our rules governing disclosure and market abuse provide protection for investors. to London. “We’re a blue riband market. If you’re an African business with aspirations, then 1930s London is your best platform,” he adds. The decade links with London and Made up of more than 50 diverse countries, from Nigeria to Kenya, Mauritius, Africa were made. Zimbabwe and South Africa, Africa has achieved growth rates in recent years that would be the envy of any Western economy. 119 At five per cent, the average economic growth of sub-Saharan Africa outstripped The total number of African that of more than 70 per cent of the world in 2013 according to the International companies listed in London, with 29 Monetary Fund (IMF). on the Main Market and 90 on AIM. The rate of growth is expected to accelerate to six per cent in 2014 and, over the next five years, no less than half the world’s fastest-growing economies will be in sub- 5% Saharan Africa, with another two in North Africa, according to IMF forecasts. The average economic growth of LSEG is playing its part in the African growth story. African companies looking to sub-Saharan Africa outstripping London have traditionally come from the natural resources sector – oil and gas, more than 70 per cent of the mining and precious metals. But the range of sectors is now broadening as the world in 2013 according to the economies of the continent mature and millions more consumers enter its rapidly International Monetary expanding middle class. Fund (IMF). “Media companies, airlines, real estate and consumer goods companies from Africa are now all represented in London and we expect that trend to continue,” says 6% Adebayo. The rate of growth is expected to At $75 billion, the collective worth of African companies on the London market is accelerate in 2014 and, over the second only to the Johannesburg Stock Exchange. In total, there are 119 African next five years, no less than companies listed in London, with 29 on the Main Market and 90 on AIM. half the world’s fastest-growing economies will be in sub- Among those African companies listing in London last year was Zenith Bank, Saharan Africa. Nigeria’s second largest bank and one of the few banks to emerge from the 2008-9 financial crisis intact.

Zenith was already listed on the Lagos Stock Exchange and raised no new capital £4.2bn through its London debut. Instead, the group used the listing to increase its profile in The amount raised since 2008 by the international financial world and provide potential investors with the reassurance African-focused companies in new that it was able to meet London’s strict corporate governance criteria. and further issues. “London has given the bank access to a wide range of major institutional investors $75bn wanting to buy into the continent’s growth story,” says Adebayo. The collective worth of African Local talent companies on London Stock Since 2008, African-focused companies have raised £4.2 billion in London in new Exchange. and further issues. London Stock Exchange has long attracted Africa’s resources companies, many of which are run by Western management, but Adebayo highlights London Stock Exchange Group plc Yearbook 2014 Raising Finance 23 Raising Finance Section 2

Our ability to attract such experienced “and high quality directors along with obtaining professional advice from leading organisations in London has enabled Lekoil to develop at a rate that would not have been possible otherwise.

the growing number of indigenous businesses that are enabled Lekoil to develop at a rate that would not looking to London for their financing needs. have been possible otherwise. There is undoubtedly a strong link between investment opportunities in Africa One such success story is Lekoil, the Nigerian and capital from London and we see ourselves as an exploration group that raised £27 million when it important part of this growing movement,” he says. floated on AIM in May 2013. Less than six months later, the group was able to go back to the market LSEG also works closely with the major African and successfully raised a further £60 million, at 55p a exchanges, providing trading software and clearing share, comfortably above the May float price of 40p. technology. “We want to help create an environment where they are able to found local businesses,” says The capital raised in London has enabled Lekoil Adebayo. “We engage with them on a collaborative basis, to fund exploration work at its promising drilling to help bring the liquidity pool of London to Africa.” prospects off the coast of Nigeria. Chief executive and founding director, Lekan Akinyanmi, says he has been Once a company has outgrown its local market, “extremely pleased” with the positive response from however, London can fulfill its financing needs. As investors in London. Adebayo explains: “In terms of access to capital, the beauty of London is that it’s not just UK investors “Our ability to attract such experienced and high here, it’s global institutions, from US pension funds to quality directors along with obtaining professional Singaporean sovereign wealth funds, German hedge advice from leading organisations in London has funds and so on.” n 24 Section 2 London Stock Exchange Group plc Yearbook 2014

Supporting the new wave

SMALLER COMPANIES ARE THE BACKBONE OF ECONOMIC GROWTH AND LONDON STOCK EXCHANGE GROUP SUPPORTS THEM ON AIM, ELITE, STAR AND THE HIGH GROWTH SEGMENT, AS DAVID WALLER EXPLAINS.

he spotlight may have shone on IPOs by companies backers can float these companies without having to give such as Countrywide, Direct Line and Royal Mail in up a large share, enabling more companies to consider T 2013, but global economic prosperity is not just flotation as a viable avenue for growth.” about big, well-known names. Out in the wings, dynamic growing businesses are making progress too. And, through Learning from Italy initiatives and markets such as AIM, ELITE, STAR and the The rationale for new schemes such as the HGS is amply High Growth Segment, London Stock Exchange Group demonstrated by the success, in Italy, of the ELITE (LSEG) can train, support and nurture a vital and vibrant programme. Since launching in April 2012, the Borsa generation of companies. Italiana scheme has welcomed at least 30 companies

In the UK, for example, a wave of innovative businesses is emerging, from digital design in London’s Tech City to graphene manufacturing in Manchester and new media in Sheffield and Newcastle. These firms are growing fast. Often backed by venture capital, they are a new breed with new demands, which have themselves inspired innovation in the markets. 2013 In March 2013, for example, LSEG launched its new High Growth Segment, for fast-growing UK and European The year that LSEG launched companies that are not yet ready for the Main Market’s Premium segment. The High Growth Segment is designed its new High Growth for companies with compound growth of at least 20 per Segment, for fast-growing cent over three years that need a minimum free float of just 10 per cent to IPO rather than the 25 per cent required UK and European companies for a Premium listing on the the Main Market. that are not yet ready for “This new segment can help a company transition from the Main Market’s Premium private to public more seamlessly,” says Marcus Stuttard, Head of UK Primary Markets and AIM. “Venture capital segment. London Stock Exchange Group plc Yearbook 2014 Raising Finance 25

Venture capital backers

“can float these companies Raising Finance without having to give up Section 2 a large share, enabling more companies to consider flotation as a viable avenue for growth.

every six months. A unique partnership system designed public, rather providing them with a set of value added to make selective private SMEs more attractive to services: their final destination may just as easily investors, ELITE offers training, change management be private equity investment, bonds issuance or a support and funding advice. strategic partnership to fuel further growth,” says Luca Peyrano, LSEG’s Head of Primary Markets in Europe. “ELITE is innovative in a very traditional market. It’s the first time that a stock exchange has built long A look at the current ELITE crop shows the scale of term relationships with private companies, rather than its ambition. The youngest firm, Neomobile, is seven public companies. And we’re not pushing them to go years old; the oldest, Marchesi de’ Frescobaldi, a Tuscany wine producer, traces its history back seven centuries. And while the smallest, WIIT, was worth €7.5 million in 2012, the largest, food company Granarolo, was worth a hefty €923 million. ELITE’s geographical spread is equally wide: at least 10 companies hail from Campania in southern Italy, an area not traditionally well represented in the ranks of 34 listed firms. Aside from the direct benefits of the ELITE programme, The number of private equity companies also gain international exposure and media opportunities, as well as far greater networking firms partnering ELITE. There potential. There are 34 private equity firms partnering are 70 advisers on board, and the scheme, 70 advisers on board, and a secure, moderated social network through which ELITE firms a secure, moderated social can connect with their peers.

network through which “The stock market traditionally reflects the health ELITE firms can connect of the entire industrial and social landscape,” says Peyrano. “We’re working to improve the landscape, with their peers. rather than merely reflecting it.” 26 Section 2 London Stock Exchange Group plc Yearbook 2014

It certainly seems to be working. By the end of 2013, more than a dozen A look at the current ELITE companies were looking at IPOs in the medium-term; six were “ planning to issue bonds; six had completed private equity transactions, ELITE crop shows the and four had been involved in M&A activity. In October 2013, the average revenue of the ELITE group was €70 million, with an average growth rate of scale of its ambition. 13 per cent. Considering that growth across Italy was in negative territory during 2013, these are particularly impressive results.

The youngest Though ELITE has proved to be such a success, it is not the only initiative designed to benefit high-growth companies in Italy. STAR, which launched firm, Neomobile, is in 2001, sits between AIM Italia and Italy’s Main Market, and aims to give more visibility to listed companies that are small yet high in quality. With seven years old; the strict rules around corporate governance and transparency and a minimum 35 per cent free float, it is designed to allay fears commonly expressed by oldest, Marchesi de’ investors when dealing with smaller entities. Frescobaldi, traces “STAR’s set-up gives a clear message to investors that these small and mid- sized companies are behaving like large companies and adhering to the best its history back industry standards,” says Peyrano. “And every single year STAR companies have outperformed the rest of the market.”

seven centuries. Indeed, from the beginning of 2013, STAR posted a rise of 44.6 per cent, against the 16.1 per cent increase posted by FTSE Italia All Share. “When you convince a small company to be more transparent and improve its governance standard, you immediately see the differences in investors’ attention,” he adds.

AIM ahead Back in London, AIM remains the go-to market for small and growing companies, welcoming 70 new companies to market in 2013. The AIM 50 was the best-performing UK index in 2013 while the market in general has seen an upturn in activity, thanks to improved economic confidence, an inflow of money into equities and an increase in private equity and venture capital exits.

A number of stars stand out. Tech company Plus500, for example, has seen its share price jump 400 per cent, while biotech firm Retroscreen Virology is up 200 per cent.

“Since April last year really there’s been an increase in strong companies coming to the market from a wide range of sectors – in particular software, biotech and technology. Successful IPOs show other companies the benefits of floating and this strengthens the pipeline. Since launching in 1995 we’ve consciously ensured the AIM environment is less prescriptive and more tailored for small or high-growth businesses, compared to the Main Market. The market and pipeline is very healthy,” says Stuttard.

It has also experienced some fiscal developments. In April 2014, the Government abolished stamp duty for companies on growth markets including AIM. And in August last year, AIM shares became eligible for inclusion in ISAs, which were previously open only to Main Market shares.

“We’re always looking at initiatives to widen the base of investors able and willing to support high growth businesses,” explains Stuttard.

Such developments highlight LSEG’s commitment to the high-growth sector and, in turn, to broader economic growth.

“Ensuring that our markets are innovative and supportive of growth helps to show companies that exit options are out there, which reassures investors across the board, be they venture capitalists, business angels or friends and family making early stage investments,” says Stuttard. “This is very positive, and it is vital for economic growth.” n London Stock Exchange Group plc Yearbook 2014 Raising Finance 27

Tech savvy Raising Finance

FROM SILICON FEN TO SILICON GLEN, TECH CLUSTERS ARE Section 2 SPRINGING UP ALL OVER THE UK. LONDON STOCK EXCHANGE

GROUP IS ACTIVELY SUPPORTING THEIR DEVELOPMENT, AS FIONA WALSH REPORTS.

t might only be a short stroll from Tech City to the The right signals City of London, but to the digital entrepreneurs “These businesses, which feel they are too big for AIM, need I who work in the UK’s answer to Silicon Valley, the capital but their investors also want to remain part of the financiers of the Square Mile have traditionally seemed ownership structure. This new segment sends the signal a world away. that we are keen to attract these businesses, understand their needs and can offer them greater flexibility while still Now, however, the ties between the two are strengthening, maintaining LSEG’s hallmark standards of governance and thanks to a series of initiatives from the Government and regulation,” says Millar. London Stock Exchange Group (LSEG). LSEG is also playing a wider role in the development of As the UK consolidates its position as an international Britain’s high-tech sector and educating entrepreneurs centre for tech companies, there has been a surge in the about the options available to them. number of tech IPOs in London. In 2013, more than two dozen companies joined the London markets, many of “The markets we operate sit towards the top of the financing them floating on AIM, LSEG’s market for smaller, growing chain, but have an important influence on the whole businesses. Raising some £1 billion in total, this marked the financing ecosystem in the UK. It’s important to make sure strongest year for tech floats in London since 2007, both in that businesses have access to the right sort of funding terms of numbers and the amount of capital raised. and that they feel confident in their ability to raise capital at every stage of their development,” says Marcus Stuttard, More companies are lining up to take the same path, Head of AIM. spurred on by the success of recent IPOs and attracted by the fact that London now offers a wider range of funding choices than ever before, as well as support for ambitious tech companies.

“AIM is ideal for smaller businesses but slightly larger tech and internet-driven businesses often have pre-IPO shareholders who want to continue to support the £1bn business and participate in the growth alongside public market investors,” says John Millar, Head of Primary Markets at LSEG. The figure in total that marked 2013 as the That led to the launch last year of the High Growth Segment (HGS) which offers another route to market for strongest year for tech floats companies that aspire ultimately to a Premium listing on the Main Market. Businesses that meet certain growth in London since 2007, both criteria are able to float just 10 per cent of their shares in terms of numbers and the when they join the HGS, rather than the 25 per cent required on the Main Market. amount of capital raised. 28 Section 2 London Stock Exchange Group plc Yearbook 2014

Tech businesses develop “much more rapidly than traditional brick £4m and mortar companies. The figure raised when Blur We sometimes need to floated on AIM in late 2012. change our approach Within a year, its shares had jumped from 82p to 485p. to meet their needs and we’re committed Being aware of the equity financing options available to playing our part in to them – whether it be business angels, crowd- funding, venture capital or an IPO – could help save UK restarting the debate companies from selling out, often to an overseas buyer. “Many entrepreneurs start thinking about finance on how to fund these relatively late in the day, and if they need cash, and an attractive bid is put on the table, they may feel businesses. they have little option but to take it,” says Millar. “If they get bought by a US company, then jobs will shift across the Atlantic.”

One of the recent successful tech floats in London has been Blur Group, the business-to-business online procurement company. Despite being one of the few UK tech entrepreneurs to have been CEO of a major Silicon Valley tech company, founder Philip Letts chose to float in London rather than on NASDAQ.

“To be successful on the US markets you really need to have a big business in the US; otherwise you won’t succeed. For earlier stage companies, it has to be the UK. London Stock Exchange has a little jewel with AIM,” he says.

Blur floated on AIM in late 2012, when it raised £4 million. Within a year, its shares had jumped from 82p to 485p. Letts is excited about prospects for the UK’s tech sector and is setting up a new research and development centre in Exeter. He believes the south west of the country shares many of the same characteristics as Silicon Valley in California and is in a “prime position” Blur floated on AIM in late 2012, when it raised £4 million. to become the UK’s leading tech region. Within a year, its shares had jumped from 82p to 485p “We looked at cities all over Europe – Dublin, Belfast, Cambridge, Berlin and also Stockholm. But none of them ticked more than half our boxes. Then we went to Exeter and it scored on nearly every count. It has a track record of innovation and the right kind of universities,” he says. London Stock Exchange Group plc Yearbook 2014 Raising Finance 29

LSEG is one piece of “the puzzle, rather than all things to everyone. Raising Finance

A lot of what we are Section 2 doing is providing connectivity. And in the fast-moving digital world, connectivity is what it’s all about.

Clustered together Much of the focus in recent times has been on the London tech cluster located around Old Street roundabout in Shoreditch, also known as Tech City or Silicon Roundabout. The first digital companies sprang up here in 2008; two years later Prime Minister David Cameron outlined the Government’s ambition for London’s East End to become “a world-leading technology city to rival Silicon Valley.”

But the thriving community of fast-growing tech businesses based in London’s East End is not the only high-tech hotspot. There are more than a dozen growing tech clusters around the country, from Cambridge – nicknamed Silicon Fen – to a trio of cities in Scotland – Glasgow, Edinburgh and Dundee – also known as Silicon Glen. Other hubs include Oxford, Southampton, Newcastle, Leeds and Sheffield.

LSEG plays its part in promoting the UK tech industry, supporting roadshows around the country, hosting its own events and working closely with bodies such as the Tech City Investment Organisation, which was established to support the East London tech cluster. LSEG also operates a scheme to provide coaching and mentoring to small tech companies, helping them to build their business plans.

“Tech businesses are very different, they develop much more rapidly than traditional bricks and mortar companies. We sometimes need to change our approach to meet their needs and we’re committed to playing our part in restarting the debate on how to fund these businesses,” says Millar.

“LSEG is one piece of the puzzle, rather than all things to everyone. A lot of what we are doing is providing connectivity.”

And in the fast-moving digital world, connectivity is what it’s all about. n 30 Section 2 London Stock Exchange Group plc Yearbook 2014

The rise of the retail bond

LONDON STOCK EXCHANGE GROUP’S RETAIL BOND PLATFORMS HAVE BEEN HIGHLY SUCCESSFUL IN THE UK AND ITALY. BUT THERE IS PLENTY OF POTENTIAL FOR GROWTH, AS HELEN POWER REPORTS.

etail bonds have taken the UK by storm since Fast-forward to 2010, and the Italian prototype looked London Stock Exchange Group (LSEG) opened very compelling for UK companies struggling to Rup the corporate debt market to private borrow from a broken banking system and the banks investors in 2010. themselves, anxious to rebuild their weakened balance sheets. At the same time, UK investors were getting a Initially, just ten corporate bonds were traded on the raw deal, as savings rates remained stuck at historic Order Book for Retail Bonds (ORB). Now there are more lows. The market was ripe for a new type of corporate than a hundred, with household names including Tesco fundraising that would allow corporate and financial and National Grid, as well as LSEG itself, taking its lead borrowers to raise money directly from private investors. from UK investors’ desire for a better yield than that which is on offer from standard savings accounts. So, with the backing of the UK Government, LSEG exported the fundamentals of Borsa Italiana’s MOT to London, However, the retail bond market revolution actually launching ORB as a Financial Conduct Authority-regulated, began in Italy. More than 15 years before London’s MIFID-compliant, retail fund-raising and trading platform. move into retail bonds, Borsa Italiana was routinely providing sovereign and corporate bonds to domestic From the start however LSEG was mindful of key differences and European investors. Borsa’s retail bond market, between the UK and Italian retail investment community. MOT, which will celebrate its twentieth anniversary next year, is the biggest bond market in Europe by turnover, “It was clear that the needs of UK retail investors were with trades worth a billion euros completed every day. quite different from those in the wider European markets. Traditionally, UK investors have been equity-driven and Pietro Poletto, LSEG’s Head of Fixed Income Markets, only recently has there been a change of attitude to bonds. who oversees both ORB and the MOT, believes the Education is key to our strategy, not only in the UK, but trend began in Italy because successive cash-strapped everywhere – it’s important to educate investors and the Italian governments desperately needed capital. wider community as to how to interact with a new market,” says Poletto. “Investors in Italy are familiar with this type of financial instrument, probably because Italian Top names come to market government debt has been quite large historically, Fortunately, an influx of new issues from household names so retail investors were happy to invest in it and catapulted retail bonds into the consciousness of small considered it secure,” he says. investors struggling to find decent returns on their capital. Tesco’s financial services arm, for example, accessed the What started as a market for Italian sovereign bonds market three times, including an innovative, inflation- quickly became another fund-raising avenue for Italian linked transaction. businesses. “We have come to ORB three times, and each time we have “There was already a strong community of brokers seen really strong demand from investors. London Stock in place who worked in the Italian government debt Exchange gives the market real credibility, and from our market and they helped to drive a dramatic increase in perspective ORB provides us with another funding source,” interest in corporate debt,” he adds. says Paul Fuller, Head of Market Execution at Tesco Bank. London Stock Exchange Group plc Yearbook 2014 Raising Finance 31 Raising Finance Section 2

We have come to ORB three times, and each “time we have seen really strong demand from investors. London Stock Exchange gives the market real credibility, and from our perspective ORB provides us with another funding source.

“ORB also allows you to do smaller deals than the “We had a very good experience. We were well advised by institutional market,” he adds. our PRs and our lead manager and we even got to open trading on London Stock Exchange. We would definitely Other issuers range from international utility National Grid like to come back to the market,” he adds. to specialist mortgage provider Paragon Group. Oil and gas group Premier Oil accessed ORB late last year “We were used to the institutional bond market but ORB and also experienced robust demand. gave us access to a different group of investors. We also issued an eight-year bond, whereas a typical institutional “We do not have a credit rating, so when we looked at deal would be three to five years,” says Nigel Terrington, the sterling bond market, ORB was an obvious place Chief Executive of Paragon Group. for us. Initially, we were concerned that the issue sizes might be a bit small, given the documentation Such was demand for Paragon’s £60 million transaction, requirements. But over time, the market proved it was the books were closed early. perfectly capable of absorbing larger transactions, so it 32 Section 2 London Stock Exchange Group plc Yearbook 2014

The idea is to maximise these assets, “offering not just a market for Italian or UK investors, but a solution for all investors across Europe. The foundation is already in place, so we are in good shape to export our skills.

became more attractive to us. We also structured our “The experience of EuroTLX shows there is documentation as part of a broader MTN (medium- appetite from issuers and investors, provided the term note) programme so we can use it to issue bonds circumstances are right and the knowledge is there,” in other currencies and markets,” says Tony Durrant, he says. Chief Financial Officer at Premier Oil. Medium-sized companies are just part of LSEG’s Broadening the scope strategy however. In both the UK and Italy, the Group Looking to the future, Poletto believes macro- is keen to attract a range of corporate, banking and economic fundamentals will help to sustain British government issuers. investors’ appetite for retail bonds. In London in particular, Poletto sees LSEG offering “It seems that interest rates will remain at a low level for banks a platform for some mutual bond funds that a while and many medium-sized companies are keen they would have run in-house before the credit crisis. to secure non-bank debt. This is an area that we are just beginning to exploit but there is real potential for “Some big banks that previously managed bond funds growth,” he says. internally may now prefer to outsource some services because of the potential for conflicts of interest and “The UK Government has long been asking how it reputational risk in the wake of recent scandals like might be possible to help companies in these difficult LIBOR and interest rate swap mis-selling,” he says. times to find alternative finance. ORB could provide these businesses with a solution to the credit crunch, Central to LSEG’s ambitions is the creation of a particularly if they have a good story, but it will pan-European platform for retail bonds – and more depend on their quality and on there being advisors broadly, all fixed income products. and brokers with the expertise and knowledge to help them,” he adds. “The idea is to maximise these assets, offering not just a market for Italian or UK investors, but Poletto points to Italy where LSEG recently acquired a a solution for all investors across Europe. The majority stake in EuroTLX, another retail-focused fixed foundation is already in place, so we are in good income platform, which has been used successfully by shape to export our skills.” n a number of medium-sized companies. London Stock Exchange Group plc Yearbook 2014 Raising Finance 33

A luxury experience Raising Finance

HIGH FINANCE AND HIGH FASHION ARE INTERTWINED Section 2 IN ITALY. BUT THE ITALIAN MARKETS ARE NOT JUST

ABOUT COUTURE, AS ANGELA JAMESON REPORTS.

n fashion week, Milan’s stock exchange doubles up are of great importance to the whole Italian economy as a models’ runway. So it is perhaps no surprise and in particular Milan. Our city has an ambition to Ithat Borsa Italiana and VOGUE Italia joined forces become the world leader in this particular field,” he says. last autumn in staging a conference where Italy’s leading luxury goods companies and fashion houses explained The years immediately after the financial crisis were their businesses to investors and financiers from 88 tough for Borsa Italiana, in common with other international investment houses. exchanges across Europe. The Italian exchange, which became part of London Stock Exchange Group (LSEG) in Featured brands included world-leading fashion houses 2007, experienced lower trading volumes and a decline Prada, Salvatore Ferragamo and Tod’s; renowned drinks in the number of IPOs. group Gruppo Campari and Brunello Cucinelli, known as the ‘king of cashmere.’ But the situation improved in 2013, with seven listings on the main market and 15 on AIM Italia, the market Raffaele Jerusalmi, Chief Executive of Borsa Italiana, wants for smaller growth companies that aims to emulate the to nurture these showcases for Italian industry, supporting success of London’s AIM market. those brands which are listed and encouraging those which are still private to IPO in Milan. Jerusalmi, who as well as chief executive of Borsa Italiana, is also Executive Director of Capital Markets at “Through this event and others like it, Borsa Italiana the Group, has high hopes for the coming year. “2013 set confirms its commitment to supporting and developing a record for new listings and 2014 should be strong too,” Italian companies. The luxury, fashion and design sectors he says. 34 Section 2 London Stock Exchange Group plc Yearbook 2014

Over the past four years, the FTSE Italia personal goods “index has grown 136 per cent and Borsa Italiana calculates that half the global luxury and fashion market is now listed in Milan, with a market capitalisation of almost €57 billion.

$300bn 24%

Value of designer The average market goods market in share of Italian 2013 brands today

Moleskine, the luxury notebook maker, kick-started growth in recent years, primarily thanks to soaring the market in 2013 when it listed in April. Famed for Chinese demand for designer goods. its pocket-size notebooks that emulate those used by Ernest Hemingway and Jack Kerouac, Moleskine was Over the past ten years, the market has surged in value, Italy’s first listing for almost a year. and by 2013 it was valued at almost $300 billion.

Subsequent IPOs came from outside the luxury Growth has slowed in the past two years – rising only 2 sector, including WDF, the duty-free shopping retailer per cent from 2012 to 2013 – but Italy is capturing and CNH Industrial, created from the merger of Fiat market share. Industrial and CNH. “The overall rate of growth has slowed but Italian Demand for deluxe brands have gained the largest market share, up from While these examples confirm Milan’s appeal as 21 per cent in 1995 to 24 per cent today, almost a listing venue for sectors beyond fashion, Borsa equalling French brands’ 25 per cent share,” says Italiana is still most closely associated with the luxury Claudia D’Arpizio, from management consultancy Bain goods market, an industry that has experienced rapid & Company. London Stock Exchange Group plc Yearbook 2014 Raising Finance 35 Raising Finance Moleskine® Section 2

136% €57bn

Growth of FTSE Capitalisation of Italia personal luxury and fashion goods index market listed in Milan

This increased demand for Italian luxury goods of trading. The performance was particularly noteworthy is boosting market sentiment, prompting more as the flotation took place just nine days before companies to consider listing. Christmas, when many investors are winding down.

“Interest in European equities – including Italy – has “The extraordinary result from the IPO of Moncler is a increased, so conditions are more favourable now than symbol of the success of Italian entrepreneurship in the they have been in years for IPOs to occur in Italy,” says world,” said Jerusalmi. Peter Lenardos, an analyst at RBC Capital Markets. More companies are expected to list in the coming Luxury ski jacket manufacturer Moncler highlighted months and there is a fair wind behind them. Over the the shift in sentiment, with Italy’s largest flotation past four years, the FTSE Italia personal goods index since 2010. has grown 136 per cent compared with a 12 per cent fall in the FTSE Italia All Share index. And Borsa Italiana Having priced its shares at €10.20 apiece to give a calculates that half the luxury and fashion market is market capitalization of more than €2.5 billion, the now listed in Milan, with a market capitalisation of company saw its shares soar 50 per cent on the first day almost €57 billion. 36 Section 2 London Stock Exchange Group plc Yearbook 2014

“We are becoming the centre of reference for the listing prejudice towards listing from these smaller companies of fashion and luxury goods,” says Jerusalmi. and represents an opening up of capital to third parties,” Jerusalmi explains. One of Borsa Italiana’s advantages over rivals is the international nature of the investors it attracts. Some 1,200 Such a development is particularly beneficial in today’s asset management firms are represented at Borsa Italiana Italian SME market, where corporate finance has and an assessment of Milan’s largest listed companies traditionally been dominated by bank lending. According shows that 96 per cent of their institutional investors are to the Bank of Italy, domestic banks are now lending based outside Italy. two-thirds less than they were in 2006, leaving smaller companies in real need of alternative capital solutions. “This diversity means that fashion companies who list here receive global attention,” says Jerusalmi. ELITE complements the Borsa Italiana STAR segment, dedicated to mid-ranking listed companies capitalised Many of Italy’s best-known fashion houses remain between €40 million and €100 million. And Borsa Italiana’s independent and family-owned, including Giorgio Armani, retail bond market, MOT, is another source of capital. Ermenegildo Zegna and Dolce & Gabbana. Yet Italian luxury Benefiting from strong retail investor demand, MOT consultancy Pambianco estimates that as many as 50 regularly sees €1 billion of trading a day. fashion and luxury brands are large enough to be listed. For Jerusalmi, Borsa Italiana, STAR, AIM Italia, ELITE and Elite service MOT all share a common aim: to help Italian companies There are also hundreds of up-and-coming companies, too grow by providing them with efficient sources of capital. small to list now but likely to seek flotation as they expand. With this in mind, Borsa Italiana launched ELITE, an Over time, he is confident that together, these venues advisory service for entrepreneurial businesses. will contribute to Italian economic recovery and provide a rewarding home for the best of Italy’s fashion and Set up in 2012 with the Bocconi University business school, luxury houses. Elite has already signed up 131 companies. “Milan and Borsa Italiana offer an ideal match for the world’s “We can put them in touch with investors at an early fashion elite. We are growing the exchange, growing our stage and help them to prepare to approach the capital services for SMEs and expanding MOT. I am optimistic about markets within three years. This helps to overcome further success, as the economic recovery develops,” he says. n Section 2 Raising Finance 37 12/12/2013 14:30 Finance Raising such as the UEFA Champions League Final are not included within the Club Wembley membership. not included within the Club Wembley are Champions League Final such as the UEFA

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Section 3 Trading on our Markets 40 Section 3 London Stock Exchange Group plc Yearbook 2014

All change for derivatives

COMPETITION BETWEEN DERIVATIVES EXCHANGES IS INTENSIFYING AS REGULATORS PUSH TRADING OF OVER-THE-COUNTER CONTRACTS ONTO ELECTRONIC MARKETS. DAN BARNES REPORTS.

he dominant four derivatives exchanges – business is one of the lowest in Europe while the CME, Eurex, ICE and its recently acquired rival underlying equity cash market is one of the most TLIFFE – have faced little competition over the dynamic, international and developed. Our goal is to last decade. Some have offered a one-stop shop with bring liquidity back in derivatives through innovation, cost incentives to keep clients loyal. Others have kept broadening the user base and lowering the end-to-end a tight grip on intellectual property rights, making cost of trading in equities.” it hard for rivals to cut in on popular products. Now, however, the environment is changing. New ground Other changes are on the horizon too. OTC derivatives In July 2013, the derivatives business of the contracts are pushed towards trading on electronic Turquoise Multilateral Trading Facility (MTF) was platforms and central clearing, following a 2009 G20 transferred to London Stock Exchange and renamed mandate. These changes will be brought into effect London Stock Exchange Derivatives Market. in Europe under the European Market Infrastructure Turquoise is majority owned by LSEG, but bringing Regulation (EMIR) which will deliver central clearing, the derivatives market onto London Stock Exchange and the Markets in Financial Instruments Regulation delivered two major advantages. (MiFIR) which will create the regime for electronic markets or Organised Trading Facilities (OTFs). First, the transfer allows London Stock Exchange to push into the derivatives market more aggressively by LSEG is now able to meet those G20 requirements for leveraging its membership, network and brand. both trading and clearing OTC derivatives trades. Its electronic bond trading platform, MTS, announced Second, the majority of firms trading directly or via in June that it would launch a new trading venue for brokers on London Stock Exchange Group’s derivatives buy-side firms to trade interest rate swaps, called MTS markets have a preference for dealing on a recognised Swaps. This meets the stipulation that an electronic investment exchange. venue should support the trading of standardised OTC derivatives contracts, and sits well with LSEG’s “We are in a world of very big players in derivatives,” purchase of a majority stake in the clearing house and says Nicolas Bertrand, Head of Equity and Derivatives central counterparty (CCP) LCH. Clearnet in 2013. Markets at London Stock Exchange Group (LSEG). “Eurex, IntercontinentalExchange and CME are several The shift in trading models towards on-market times bigger than their nearest competitors. However, and central clearing will make the market more I would say that innovation tends to come from the transparent but it comes at a price. CCPs require little guys.” traders that clear trades with them to cover their positions and any changes in the value of contract. The decision to bring derivatives trading onto London This requires the traders to post assets as collateral Stock Exchange may also fuel growth more broadly, with the CCP. bringing the UK derivatives market in line with other European financial centres. “US regulators are happy with exchanges selecting in-house clearers to process trades, whereas European “The UK equity derivatives market is under-developed regulators say there must be the option for firms compared to its European peers,” says Bertrand. “The to select their own clearers,” says Radi Khasawneh, open interest and liquidity of the UK stock option analyst at research firm TABB Group. “However if firms Section 3 Trading on our Markets 41

our Markets on Trading

trade with London Stock Exchange, in practice Stock Exchange, in practice with London trade by to be cleared all of their trades they will prefer they post the margin LCH. Clearnet because then their long and short for with the CCP as insurance their costs.” reducing positions is netted down, to be of have collateral The assets used for to Anthony According good quality and liquid. and body the Futures CEO of trade Belchambers, to Options Association, this may cause some firms their use of derivatives. rethink concerned, they are are as end users “As far cost,” he says. “As increased guys for the fall expensive for managing risk becomes more they products, both OTC and exchange-traded at whether their will be looking long and hard and working are risk management strategies OTC As we know, back on these. they may pare and even though expensive will be extremely will go up contracts exchange-traded standardised in cost, they will be cheaper than OTC, so perhaps to take a bit of basis risk on the firms will prefer it will be cheaper.” nose, because overall cost pressures, of traders’ is acutely aware Bertrand to on ways is working Stock Exchange so London to liquidity attract enhance efficiency and thereby the market. about dealing with specific needs are “Derivatives an costs are where moving into a world but we are with this innovating and we are important factor example, we launched pan-European in mind. For on the IDEM, Borsa single stock dividend futures the This completes platform. Italiana’s derivatives one of the market, of the Italian derivatives range a valid but also provides most liquid in Europe, reductions to significant cost alternative with very he says. on Eurex,” the same product space will be those in the derivatives The winners capable of delivering both liquidity and innovation nimble enough to move with the and those who are the towards in equities improved Interest market. out of bonds into end of 2013 but the ‘big rotation’ has not yet occurred. stocks, long predicted, will happen,” “No one can say when the rotation an investor “However if you are notes Bertrand. sitting on a pile of money, you better be well business balanced. Which is why the derivatives Stock Exchange Group. to London is fundamental with the opportunity investors need to provide We to manage their risk in a and an alternative way n better way.”

trading in equities. trading the end-to-end cost of the user base and lowering innovation, broadening of broadening innovation, derivatives through through derivatives liquidity back in Our goal is to bring “ 2014 plc Yearbook Group Stock Exchange London 42 Section 3 London Stock Exchange Group plc Yearbook 2014

Talking Turquoise

ROBERT BARNES IS CHIEF EXECUTIVE OF THE MULTI-LATERAL TRADING FACILITY, TURQUOISE. APPOINTED IN AUGUST 2013, HE WAS FORMERLY A MANAGING DIRECTOR OF UBS, WHERE HE RAN THE SWISS BANK’S OWN MULTI-LATERAL TRADING FACILITY. AN EXPERT ON MARKET STRUCTURES. HERE HE EXPLAINS WHAT MAKES TURQUOISE STAND OUT IN THE MARKET AND WHERE HE HOPES TO TAKE THE BUSINESS.

Q: WHAT EXACTLY IS TURQUOISE AND WHAT benefit is certainty of trade. The challenge is potential DOES IT DO? market impact. Dark order books mitigate potential market impact by allowing orders to reside in an order A: Turquoise is a trading platform majority owned by book where the price and size of an order is not displayed London Stock Exchange Group, in partnership with the until after the trade. Users of a dark book, therefore, have user community. Turquoise aims to be the venue of choice no certainty – pre-trade – that another order is in the dark for trading European equities. With a single connection to book. The benefit, however, is the ability to place orders Turquoise, users can trade thousands of equities from 18 without revealing one’s intention, pre-trade. Furthermore, countries across Europe. an investor can peg the non-displayed price of the order in the dark book to follow the mid-point of the bid and offer Q: HOW DOES TURQUOISE DIFFER FROM displayed on the reference lit Exchange. After a trade, the LONDON STOCK EXCHANGE OR BORSA price and size of the completed order is published. This ITALIANA? is important as it adds to transparency for all investors, because post-trade transparency is pre-trade transparency A: London Stock Exchange and Borsa Italiana operate both for the next trade. primary markets, on which companies can list securities, and secondary markets on which investors can trade these Q: WHAT DOES TURQUOISE OFFER? securities via respective UK and Italian lit orderbooks. Turquoise is for trading a pan-European stock universe on a A: Turquoise offers access to two discrete order books choice of lit and dark order books. for complementary liquidity, an Integrated Lit book as well as a dark pool. Turquoise Midpoint Dark features two Q: WHAT DOES THIS MEAN? distinct functionalities: continuous matching at mid-point and Turquoise Uncross™, an innovation that provides A: Choice of complementary trading mechanisms, randomised midpoint uncrossings during the trading day. including both lit and dark order functionalities, offers customers more tools to achieve best execution. Q: WHAT MAKES THESE SPECIAL?

Q: WHAT ARE FEATURES OF LIT AND DARK A: Turquoise Integrated Lit has a wide European stock ORDER BOOKS? universe, including emerging markets like Czech Republic and Hungary. Turquoise Midpoint Dark features size priority A: Lit order books display price and size of bids and offers that promotes larger orders. Turquoise Uncross™ also on screen so that orders are visible prior to execution. The benefits from its randomised function. Having a series of London Stock Exchange Group plc Yearbook 2014 Trading on our Markets 43

We constantly seek to innovate, execute and “implement best practice. In recent months, for example, we branded Turquoise Uncross™ and widened our stock universe by more than 1450, including small caps across continental Europe and the Nordic region. We optimised our post-trade model and enabled trading of European Rights. We introduced several Trading on our Markets

functional improvements to our lit and dark Section 3 order books.

periodic midpoint uncrossings with a randomised feature Q: WHO ARE YOUR CUSTOMERS? means the likelihood of matching at a fair price is higher. The result is that one can rest larger orders for longer and A: We are inclusive and welcome firms that meet execute when the reference price is more likely at a stable public membership criteria. Turquoise members level for a better execution result. We constantly seek to today include global banks and brokers, institutions innovate, execute and implement best practice. In recent with local regional and sector focus across Europe, months we branded Turquoise Uncross™ and widened specialist trading firms, and retail intermediaries. our stock universe by more than 1450, including small caps across continental Europe and the Nordic region. Q: HOW DOES TURQUOISE RELATE WITH We optimised our post-trade model and enabled trading CUSTOMERS? of European Rights. We introduced several functional improvements to our lit and dark order books. A: Turquoise was founded in 2006 by customers for customers and launched in September 2008. As part Q: ARE THESE INNOVATIONS HAVING of LSEG since 2010, we have been able to build on AN IMPACT? the offerings within the Group while maintaining the independence and spirit that the customers set up A: Yes. Turquoise average daily value traded increased from when Turquoise originally launched. The governance January 2013 by more than 135 per cent to €4bn per day in model cultivates a balanced dialogue with customers. April 2014 and is the fastest-growing equity trading platform in Europe by value matched across lit, hidden, dark and auction Q: WHAT ARE YOUR PRIORITIES FOR order books, according to data from Thomson Reuters Equity THE FUTURE? Market Share Reporter. Turquoise members traded more than €85bn in April 2014, the largest monthly value since Turquoise A: Our leading priority is to highlight the innovation launched, in more than 2100 stocks, new Turquoise records. already available on the Turquoise platform, to widen Since branding Turquoise Uncross™ in September 2013, values membership, and work with members to refine our matched using Turquoise Uncross™ increased by more than existing capabilities. We are listening and we will three times. We have received great feedback from our sell side execute. n customers as well as some of the more quantitative buy side that the quality of their executions are very high. Turquoise share of trading, now more than 10% of European total order book value traded, makes Turquoise relevant to customers, existing and prospective, as a venue with meaningful liquidity. 44 Section 3 London Stock Exchange Group plc Yearbook 2014

ETPs

EXCHANGE TRADED PRODUCTS HAVE EXPERIENCED METEORIC GROWTH OVER THE PAST DECADE AND LONDON STOCK EXCHANGE GROUP IS A LEADING PLAYER IN EUROPEAN MARKETS.

xchange Traded Products (ETPs) are ideally Taiwan and Australia. It also has more than 360 other suited to today’s investment world, where ETPs, which investors can use to buy exposure to the Eattention to costs is more widespread than coffee they drink at breakfast, the wheat in the sandwich ever before. Diverse, transparently priced and they have for lunch, the currency they spend and the accessible, ETPs appeal to a broad spectrum of natural gas that warms their home at night. investors. “The growth in the range of ETPs has been phenomenal,” London Stock Exchange is well positioned to benefit from says Walmsley. “There are now ETPs for pretty much their attractiveness, and in the last year has become the every underlying asset class.” most popular European market for listing ETPs. Broadly based, reasonably priced “London’s position as a leading international financial ETFs are generally invested in a wide range of assets centre, offering a large pool of institutional liquidity, within the same market – most commonly a market helps give us a leading position in the European ETF defined by an already established index. Investing in a market,” says Gillian Walmsley, Head of Fixed Income single ETF therefore may carry less risk than investing and Listed Products at London Stock Exchange. in an individual company’s security. ETPs also allow investors to quickly assemble a portfolio spread across ETPs have grown by leaps and bounds over the past two a range of asset classes. For example, by buying only decades. First launched in 1993, the market was valued four ETPs listed on London Stock Exchange, investors can at more than $2 trillion by the end of 2013. London gain exposure to the US, UK and Eurozone stock markets, Stock Exchange launched its first ETP, a FTSE 100 index, and to gold – a hedge investors often use against stock in 2000. Today, it offers more than a thousand products. market falls.

ETPs fall broadly into two categories: ETFs and other ETPs ETFs have the added virtue that they are typically which include Exchange Traded Commodities (ETCs). cheaper than traditional passive funds. The average Total ETFs can track an index relating to a wide range of asset Expense Ratio (TER) of an equity ETF – the total cost to classes, including equities or fixed-income. Other ETPs the investor, after allowing for all charges – is only 0.39 often track commodities, currencies and other markets. per cent, according to Morningstar Research, compared with 0.73 per cent for a retail index fund. Equity ETF Both ETFs and other ETPs are listed on a stock exchange costs are similar to those of institutional index funds. and trade like shares. In late 2013, London Stock The average TER of fixed income ETFs, at 0.23 per cent, Exchange had over 685 ETFs, offering investors exposure is lower than for retail index funds at 0.35 per cent, and to the stock markets of economies as diverse as Brazil, even than for institutional funds, at 0.28 per cent. Section 3 Trading on our Markets 45 our Markets on Trading

Exchange Traded Products (ETPs) are are (ETPs) Products Exchange Traded investmentideally suited to today’s attention to costs is more where world, Diverse, than ever before. widespread priced and accessible, ETPs transparently investors. of spectrum appeal to a broad The number of ETFs on The number of ETFs Stock Exchange London in 2013

685+ “ 2014 plc Yearbook Group Stock Exchange London 46 Section 3 London Stock Exchange Group plc Yearbook 2014

ETFs offer investors exposure to economies as diverse as Brazil, Taiwan and Australia and investors can use its “other ETPs to buy exposure to the coffee they drink at breakfast, the wheat in the sandwich they have for lunch, the currency they spend and the natural gas that warms their home at night.

As for commodities, investing in an asset class This includes, he says, frequent rebalancing of outside the ETC structure is simply not feasible for the indices’ constituent parts, and weightings for many investors as it involves buying commodities securities which reflect the number of shares which futures contracts, which requires a budget beyond are free-floating. the reach of most individuals. “Essentially, we made the switch because FTSE offered London’s advantage the best quality for our customers,” says Rzeszotko. In 2006 London Stock Exchange became the first exchange to offer multi-currency trading In the vanguard for ETPs. Multi-currency trading plays a key role The Vanguard agreement could prove a key moment in attracting dollar-based investors because for the ETF market. virtually all international commodity markets are priced in dollars and many investors do not want to add currency risk to the risk of the underlying commodity market in which they have invested. bn FTSE Group is also well positioned to grow in the $170 ETP market. In 2012 and 2013, Vanguard Asset Management, one of the world’s largest providers of ETFs, switched six ETFs accounting for $170bn of assets from rival index provider MSCI to FTSE. Vanguard Asset Management switched six Slawomir Rzeszotko, ETF Capital Markets Manager at Vanguard in London, says: “This switch had a lot to ETFs accounting for $170bn do with the fact that FTSE continuously monitors the of assets from rival index quality of its indices. It has a very strict view about what a good index needs.” provider MSCI to FTSE London Stock Exchange Group plc Yearbook 2014 Trading on our Markets 47

ETFs offer investors exposure to economies as diverse as Brazil, Taiwan and Australia and investors can use its “other ETPs to buy exposure to the coffee they drink at breakfast, the wheat in the sandwich they have for lunch, the currency they spend and the natural gas that warms their home at night. Trading on our Markets Section 3

“After the Vanguard deal, we have seen growing More than half the global ETF assets invested in China interest among asset owners in switching their index are linked to the FTSE China index, a statistic that augurs provider,” says New York-based Jonathan Horton, well for the future. Over the next decade China is set to President of FTSE North America and Chief Marketing become the world’s largest economy, which is likely to Officer for the FTSE Group. create spectacular growth in the China ETF market.

“We want to improve the service we offer our The increasing interest among investors in using customers,” says Horton. He believes that FTSE can do commercial real estate to complement their portfolios this by building on its brand name and its historical also bodes well for FTSE Group’s continued growth. For strength in areas of increasing interest to investors, example, a significant number of ETFs are based on such as China, other emerging markets, and real estate. the FTSE EPRA/NAREIT index series.

More broadly, the FTSE Group and London Stock Exchange are well placed to enhance their customer offering in response to the increasing retail interest in ETFs. In January 2013 the Retail Distribution Review (RDR) introduced changes to the commission 2013 arrangements paid to independent financial advisers (IFAs) for recommending their products. Walmsley believes the arrival of more impartial advice could encourage IFAs to look more closely at the benefits The year that RDR introduced of ETFs. changes to the commission “Because of RDR, we see opportunities for more private arrangements paid to IFAs investors to become involved in the ETP markets,” says for recommending their Walmsley. “The London retail market in ETFs is still quite small but the new regulations could change all products that so we are optimistic about the future.” n 48 Section 3 London Stock Exchange Group plc Yearbook 2014

Innovation by FTSE

FTSE HAS BEEN TRANSFORMED IN RECENT YEARS, MOVING INTO NEW SERVICES AND NEW PRODUCTS. NOW IT IS EXPECTED TO EXTEND ITS OFFERINGS FURTHER, AS IAN WYLIE REPORTS.

hen FTSE Group was launched in 1995, of the market status of every country in their global the series of indices it offered were so UK- benchmarks and assigning them to Developed, Wcentric that founder Mark Makepeace could Advanced Emerging, Secondary Emerging or Frontier meet most of his clients simply by taking a brisk walk categories. In 2010, for example, the UAE was from his office. promoted to FTSE’s Emerging index, while South Korea was recently upgraded to the Developed market index. “The most exotic trip then was up to Edinburgh,” says Makepeace, now chief executive of FTSE Watching brief and Director of Information Services at its owner, FTSE also creates an annual Watch List of London Stock Exchange Group (LSEG). “These days countries that may be subject to a change in their we have clients in Beijing, Sydney, California – all classification. These countries are reviewed by the over the world. Investment management is so much FTSE Policy Group every September for possible more international and is becoming increasingly classification changes. In the most recent annual sophisticated yet, at the same time, it is also review, two countries joined the FTSE Watch List: becoming more reliant on benchmarks. The industry Morocco which could be downgraded to Secondary has changed dramatically since FTSE first started and Emerging because of poor market liquidity, and it will continue to change going forward.” Qatar, which could be upgraded to Secondary Emerging, having ironed out some settlement Almost 20 years on, what began as a tiny startup with issues. just nine staff is now a leading global index provider employing approximately 360 staff. With operations Ukraine is no longer considered a possible Frontier around the world, FTSE calculates thousands of entrant, following issues around regulatory oversight indices that measure and benchmark financial and capital controls. China, by contrast, is on the markets and asset classes in more than 80 Watch List for possible promotion to Secondary countries. Emerging and is considered by FTSE’s Country Classification Committee to be making improvements As a result, many of the world’s biggest pension on regulatory engagement, settlement and capital funds, asset managers, exchange traded fund (ETF) flows. Argentina, meanwhile, could face possible providers and investment banks now work with FTSE demotion from Frontier. to benchmark their own investment performance, using FTSE indices to create ETFs, index tracking “The Watch List is important to clients in helping funds, structured products and index derivatives. FTSE them plan for and manage future changes,” explains also provides trading venues around the world with Makepeace. “South Korea is a major differentiating their indices. factor for FTSE. There is no doubt that the South Korean economy is developed but there is some The difference between indexing providers can at argument over whether the lack of liquidity outside first glance seem relatively small, but there are of the Asian time zone and restrictions on currency some key distinctions. FTSE was the first major trading cause unacceptable friction to international index provider to move to a formal process for investors so as to prevent it being treated as a classifying countries, conducting an annual review developed market. London Stock Exchange Group plc Yearbook 2014 Trading on our Markets 49 Trading on our Markets Section 3

Country reclassifications highlight “FTSE’s ability to reflect the perceptions and real-world experience of clients, investors and market practitioners worldwide. This willingness to listen to and collaborate with its customers is underpinning FTSE’s expansion plans.

Such shifts and reclassifications highlight FTSE’s The business helps clients to create customized indices ability to reflect the perceptions and real-world too and it works with ETF issuers, ranging from Blackrock, experience of clients, investors and market the largest in the world, to smaller operators, such as practitioners worldwide. The business also partners Global X which wanted custom-built indices for the with certain clients and overseas trading venues to smaller emerging and frontier markets. “Liquidity can create new indices and products. be a problem in certain markets, so we were able to introduce Global X to one of our institutional clients In North America, for example, FTSE works with who was interested in investing in this area,” recalls California-based Research Affiliates on the Makepeace. “The three parties worked together to create innovative FTSE RAFI Index Series where index a suitably liquid index that had exposure to the markets constituents are selected and weighted using four that both clients wanted.” fundamental factors – total cash dividends, free cash flow, total sales and book value. In Hong Kong, New products, new markets FTSE and Bank of China launched a new index range Over the coming year, the business has four key priorities tracking Renminbi offshore bonds; and in 2013, FTSE which have been developed in response to customer added a minimum variance index to the Shariah demand. The first is expansion of its offering in North compliant series it provides in partnership with America, home to almost half the world’s assets under research consultant Yassar. management. The second is expansion in China. 50 Section 3 London Stock Exchange Group plc Yearbook 2014

“China is going to be the biggest index trade of the “We are rapidly expanding our coverage of fixed next decade. FTSE is well placed to offer customers income indices provided by the FTSE/TMX joint access as a number of index funds linked to the venture, including fixed income country indices in China A Share market are linked to FTSE. We also Europe, Asia and in South America. We then plan to run the Hong Kong MPF (mandatory provident extend our coverage further by introducing regional fund) benchmarks, which are likely to be the first and global fixed income indices,” he says. international benchmarks to include A Shares,” says Makepeace. The index space is changing rapidly, and over the next five to 10 years the business of indexing is expected FTSE’s third priority centres on ETFs. “In terms of to extend beyond countries and equity exposure into equities, we are a leading player in the global ETF a world of multi-assets and factor-based investing. market. And we’re growing faster than anyone else However Makepeace believes the key to success will and aiming to attract more customers around the still be relationships with its customers. world,” explains Makepeace. “We adopt a relationship approach and building FTSE’s final priority is to develop its fixed income relationships takes time because they are built on presence, setting up bond indices around the world. trust,” explains Makepeace. “But that’s what people The Group already runs a joint venture with Canadian expect from FTSE – trust, transparency and authority. exchange operator TMX, providing benchmarks for They want us to bring together information to create a fixed income assets. consensus that becomes the authoritative source.” n

The Watch List is “important to clients in helping them plan for and manage future changes. London Stock Exchange Group plc Yearbook 2014 Trading on our Markets 51

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Call: +44 (0)117 923 0600 Email: [email protected] www.jordans.co.uk www.jordanstrustcompany.com 52 Section 3 London Stock Exchange Group plc Yearbook 2014

MTS: 25 years of expertise

BOND TRADING IS EVOLVING RAPIDLY AND FIXED-INCOME TRADING VENUE MTS IS AT THE FOREFRONT OF CHANGE. JOHN BECK REPORTS.

he electronification of bond trading is well Instruments Directive (MiFID) designed to strengthen under way. Having gathered real momentum and stabilise the European financial sector. While Tin recent years, the process is expected to gain some have proposed exempting both credit and ground still further as pressures mount on market derivative products from stricter transparency participants and they become more comfortable with requirements, European Union financial services the concept. regulator Michel Barnier has pushed for bond trading to move to open electronic platforms. Few are better placed to observe these changes than fixed-income trading venue MTS. Majority-owned by Buy-side firms, meanwhile, are facing increased audit As much as 95 London Stock Exchange Group (LSEG), MTS celebrated and regulatory demands. “Compliance, audit and per cent of the most 25 years of operations in September 2013, and its CEO regulation play a big part in the reason that people actively traded bonds Jack Jeffery expects the ratio of voice to electronic move to electronic platforms. We probably spend at could be traded trades of government bonds to change dramatically least half of our time as senior management focusing electronically in the over the next few years. on regulatory issues and making sure that we’re relatively near future. comfortable with them in terms of the business. It’s a “During 2013, the ratio was around 70:30, but we different world from how things were five years ago. I think that over the next two or three years we will see think that’s here to stay, and if anything will become, a complete reversal of that ratio. In fact, as much as even more so, something that we need to cope with,” 95 per cent of the most actively traded government says Jeffery. bonds could be traded electronically in the relatively near future,” he says. For customers, there is very little in the way of apparent downside to this move. As well as lower For market participants, one of the primary attractions pricing, a more transparent marketplace should of electronic trading is cost efficiency. Transaction allow them to be more accurate about decisions they costs can be reduced significantly, more than four- are making. fold for some products, according to a study entitled ‘Click or Call? Auction versus Search in the Over-the- “I think that’s going to be a key thing for customers: Counter Market’ by the University of California’s Haas having confidence about where they have traded, School of Business and BlackRock. For sell-side firms, where they have hedged, and about the liquidity of which there are fewer major players in the market around exiting those positions,” says Jeffery. than there once were, it provides a way to streamline operations while at the same time maintaining a wider There is also a newfound collaborative push amongst distribution to market participants. both buy-side and sell-side firms to boost credit market transparency and efficiency in a manner More transparency, lower costs which has not always been the case before. The underlying force, however, is a rapidly changing regulatory environment. Capital requirements “I don’t think we’ve ever seen the buy-side and sell- are increasing and the industry-wide drive for side being so accepting of sitting round the table and transparency is pushing secondary bond markets trying to resolve the model as they are right now. I towards an automated, venue-driven model. think that over the next two to three years, this will The European Parliament is nearing completion play out and be a significant benefit to customers and of a revised version of the Markets in Financial all of the rest of us,” explains Jeffery. London Stock Exchange Group plc Yearbook 2014 Trading on our Markets 53

For market “participants, one of the primary attractions of electronic trading is cost efficiency. Transaction costs can be reduced significantly, more Trading on our Markets

than four-fold for Section 3 some products.

In this changing environment, however, banks may have to rethink their role, just as they did when equity markets went electronic. “It doesn’t mean there won’t be a role for banks, there will be, I just think it will be a different one,” says Jeffery. “The sell-side understands that this is something they’re not going to be able to stand in the way of, and they need to find the right model for them.”

A new look Sweeping changes look set to continue and many believe that over the next two decades, markets for government and corporate bonds will start to look much more like the equities world of today: with wholesale and retail activity merged and all products cleared.

“It could even be that the push towards clearing and settlement means that every financial product will be cleared within a decade,” says Jeffery.

“I do think we will move to a much broader, regulated exchange-type environment, but not with one venue dominating. I expect there to be a number of participants who provide those services and that they will be aggregated by both buy-side and sell-side, providing one pool of liquidity for each of those customers,” he adds. 54 Section 3 London Stock Exchange Group plc Yearbook 2014

IN NUMBERS

2013 The year that MTS celebrated 25 As much as 95 per cent of years of operations. “the most actively traded 70:30 bonds could be traded The ratio of voice to electronic trades of government bonds in electronically in the 2013. relatively near future. 95% The percentage of traded In the meantime, MTS will not be standing still. Recent initiatives government bonds that could include MTS Prime, a broker-neutral market model allowing institutional investors to trade directly on its MTS Credit and MTS be traded electronically in the Swaps order book via a sponsorship arrangement. In partnership relatively near future. with broker and clearer Newedge, MTS also launched ACM (Agency Cash Management), an electronic auction-trading platform, which allows investors to enter into secured money market investments 20 years by means of the tri-party repo mechanism. Over the next two decades, markets for government and MTS has announced plans to move into the US too, with a new corporate bonds will start to platform for institutional investors. This will allow participants look much more like the equities to access real-time pricing from the major European dealers world of today: with wholesale via MTS’s BondVision platform and execute European and US and retail activity merged and all government, agency, mortgage and corporate bonds. Pre-launch issues are being addressed and future plans include an interest products cleared. rate swaps product to be launched in 2014.

The move is entirely logical. The sheer size of the US market 2014 makes it an attractive destination and MTS was keen to set up The year that Pre-launch issues shop there itself rather than enter into a partnership. It is also are being addressed. Future a marketplace in the throes of dramatic change. According to plans include an interest rate predictions from consultancy Booz & Co, up to 45 per cent of the swaps product. US corporate bond market will be traded on electronic venues within a two to five-year timespan.

“In terms of our strategy, the US was really absent. We have quite 45% a lot to offer in terms of European government bond liquidity and The percentage of the US expertise and the US treasury market is mainly focused on two corporate bond market that will be or three main vendors, so there’s room for a competitor in such traded on electronic venues within a large marketplace and it’s one in which we wish to compete,” a two to five-year timespan. explains Jeffery.

Venturing stateside is just the latest step in a process of evolution and expansion for MTS.

“Markets are changing and we are too. This process will continue over the next 25 years and beyond,” says Jeffery. n London Stock Exchange Group plc Yearbook 2014 Trading on our Markets 55

Private investor, Trading on our Markets

public markets Section 3

PRIVATE INVESTOR INTEREST IN THE STOCK MARKET IS INCREASING BUT THERE IS PLENTY OF POTENTIAL FOR FURTHER GROWTH. LONDON STOCK EXCHANGE GROUP IS SPEARHEADING A RANGE OF INITIATIVES TO BOOST RETAIL UNDERSTANDING AND INVOLVEMENT, AS HEATHER CONNON EXPLAINS.

hen the Government sold just over half its shares in Royal Mail, it attracted W700,000 retail investors, helping to make the issue one of the most over-subscribed since the heyday of privatisations in the 1980s. When 74% AIM stocks were allowed into ISAs in August 2013, turnover of shares on the junior market jumped 74 per cent in the following month, an increase attributable in large part to a surge in demand from The jump in turnover in private investors. shares on the junior market

These are just two of the signs that private investor in a single month in 2013 interest in the stock market is buoyant – and the Government is keen to encourage it further. In April when AIM stocks were 2014 stamp duty was removed from the purchase allowed into ISAs, an increase of shares on AIM. Chancellor George Osborne has also said he plans to allow private investors to attributable in large part to a buy shares in Lloyds Banking Group when further surge in demand from private tranches of the part-nationalised company are sold. investors. US$500,000,000£320,000,000 £113,000,000 £387,500,000 £83,000,000 £234,000,000 Initial Public Off ering Equity Placing Private Placement Placing, Open Off er and Initial Public Off ering Off er for Subscription Sole Sponsor, Joint Bookrunner JointJoint GlobalGlobal Co-OrdinatorCo-ordinator Joint Global Co-Ordinator Joint Bookrunner Joint Bookrunner andPlacement Financial Agent Adviser and Bookrunner and Joint Bookrunner April 2014 March 2014 January 2014 December 2013 November 2013

£125,000,000 £150,000,000 £66,000,000 £5,950,000,000 £630,000,000 Equity Placing Initial Public Off ering Equity Placing Rights Issue Equity Placing

Sponsor, Global Co-Ordinator Sole Global Co-Ordinator Joint Bookrunner and Joint Bookrunner and Joint Bookrunner and Joint Underwriter Joint Bookrunner Joint Bookrunner November 2013 October 2013 October 2013 October 2013 September 2013

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This communication has been authorised and approved by RBC Europe Limited, authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. It is not intended as an off er or solicitation for the purchase or sale of any fi nancial instrument, investment product or service. RBC Capital Markets is the global brand name for the capital markets business of Royal Bank of Canada and its affi liates, including RBC Capital Markets, LLC (member FINRA, NYSE and SIPC) and RBC Dominion Securities Inc. (member IIROC and CIPF) and RBC Europe Limited (authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority). ® Registered trademark of Royal Bank of Canada. Used under licence. © Copyright 2014. All rights reserved. Section 3 Trading on our Markets 57 our Markets on Trading to keep abreast of developments in financial markets and of developments in financial markets to keep abreast compete. and need to function enhance the skills they the Training brings together in 2009, Academy Formed and Academy Stock Exchange Services division of London campuses in London from Italiana. It operates of Borsa of the evolution to ‘interpret and Milan, with a mission by sharing views markets the international financial Aimed at both practitioners’. and expertise with market an from range its courses individuals and companies, areas specialist to more to equity markets introduction governance and financial crime risk such as corporate one-to-one coaching and management. It also offers to suit individual needs. courses bespoke training gospel the equity and derivatives LSEG is also spreading magazine launched , the quarterly Investor Private through . It in the spring of 2012 in conjunction with Prospect of 40,000 and features readership has a regular already themes and topics. of investment articles on a wide range While retail interest in equities is undoubtedly growing in equities is undoubtedly growing interest While retail European to go to reach is still some way in the UK, there the European to statistics from According standards. and Asset Management Association, retail Fund just 19 per cent of assets under accounted for investors below the management in the UK at the end of 2011, well relatively of 25 per cent. Italy scores average European well, at 42 per cent. of the size and global nature The UK position partly reflects with many international banks and fund its stock market, The or Edinburgh. London doing business from managers is also a purchases that Stamp Duty is levied on share fact similar taxes. countries have other European as few factor deals Stamp Duty will continue to be levied on Main Market AIM and evidence suggests it from even after it is removed such alternative instruments through trading encourages outside the scope of which fall difference, for as contracts the tax. the ability in technology – and particularly Improvements – means that, with investors to communicate electronically army of retail companies, the cost of servicing a large for points out sharply. And Schwieger has fallen shareholders stability on the can help to promote investors that private long-term because they often take a more register share example, than ISAs, for through when investing perspective institutional shareholders. investors private for the clamour of interest Even before under client brokers, private Mail issue, in the Royal Association, had Management the aegis of the Wealth to be given more investors retail been campaigning for opportunity to participate in new issues. The enthusiasm received suggests was Mail flotation with which the Royal tapping into this that companies could benefit from n shares. of demand for buoyant source Room for improvement Room for Stimulating interest show is just annual investor Stock Exchange’s London to improve one of the initiatives undertaken by the Group participation. The largest education and stimulate market and traders than 4,000 investors such event in the UK, more attended the show in October 2013, enjoying a wide variety financial and from and presentations seminars of workshops, for investing from ranged covered experts. Topics industry analysis and Enterprise to best execution via fusion recovery Schemes. Investment the aim of the show is to offer to Schwieger, According range of investment on the specific advice and information options available. by participants and asked a host of stopped regularly “I was extremely was of these questions questions. The standard for example, the mechanics specific on, high and often very of dealing in end of day auctions. That indicates the real investors’ and demonstrates awareness raising benefits of and advice,” he says. information appetite for at the show was Among those making presentations with sharing by LSEG, charged run an organisation Academy, Academy knowledge and expertise on financial markets. standing was there says Schwieger, – where, presentations at aimed of courses part of a programme only – are room participants and other finance professionals helping market However, there is still plenty of scope for educating retail educating retail is still plenty of scope for there However, commissioned merits of equities. Research on the investors (LSEG) in 2013 showed Stock Exchange Group by London ISA private in the UK who have that almost half the people and pensions do not know how their money is investments of almost a quarter did not know the value while invested, their investments. a definite is still that there demonstrates “This clearly better education scope for in an improvement need for in the of both active and passive investors and awareness Head of Equities at LSEG. “And UK,” says Brian Schwieger, informed should lead to more that better understanding activity.” investor to put investors place for a natural of course, are, Shares potential combination of growth a their cash as they offer dividends. from and income price appreciation share from to find been hard have returns these sort of Recently, lows. at record rates especially with interest elsewhere, offers financial centre, of the world’s as the heart London, it has the most equity investors: for particular attractions AIM, venue in Europe, small company trading successful and internationally access to a large investors and offers quoted on the Main of small companies range vibrant chance to gain exposure the investors And it offers Market. as many of to both UK and international economic growth, extensive global its domestically quoted companies have interests. trading 2014 plc Yearbook Group Stock Exchange London The Island’s position on the doorstep of the UK (and continental Europe) means it is ideally located to service clients wishing to list on the London Stock Exchange. A leader for The fact that there are regular 40-minute flights between Guernsey and the City of London makes doing business quick and easy and this is also assisted by being in London Stock Exchange listings... the same time zone, speaking the same language and using the same currency. Guernsey also boasts a longstanding financial services industry with banking, private wealth, investment funds and insurance sectors supported by a network of professional services, including multi-jurisdictional law firms and global accountancy practices with specialists advising on London Stock Exchange listings.

They work in a regulatory and legislative environment which has been proven through the years to offer high standards while retaining speed and simplicity for Guernsey clients. It is this framework which means Guernsey remains a jurisdiction of choice for listings on the markets of the London Stock Exchange.

Guernsey is a leading jurisdiction for establishing vehicles listing on the London Stock Exchange.

The Island’s experience has developed the infrastructure and expertise which make it quick and easy to access capital markets. This reputation means that Guernsey remains the first choice of many professionals considering where to domicile their listing vehicles. Guernsey entities are spread across the London Stock Exchange’s Main Market, AIM and SFM and range from major corporations through to niche investment vehicles, including a significant number of investment funds.

Existing and new fund promoters are particularly attracted to Guernsey by its reputation for servicing closed-ended listed structures, including private equity however, Guernsey listed structures can be used for a wide variety of purposes. The Island also has a hallmark innovation in the capital markets, with vehicles being used to attract investment into niche asset classes such as Insurance Linked Securities (ILS). PO Box 655, North Plantation, Guernsey is renowned as a good home for vehicles which are established for St Peter Port, Guernsey, GY1 3PN raising capital to invest into infrastructure projects. It is this experience and expertise which has led to Guernsey becoming the first port of call for fund Phone: +44 (0) 1481 720071 managers seeking to raise funds from the capital markets for investing into Email: [email protected] emerging economies, for example the Far East, Russia, Latin America and India. Web: www.guernseyfinance.com

LSE A3.indd 1 5/7/2014 4:38:10 PM The Island’s position on the doorstep of the UK (and continental Europe) means it is ideally located to service clients wishing to list on the London Stock Exchange. A leader for The fact that there are regular 40-minute flights between Guernsey and the City of London makes doing business quick and easy and this is also assisted by being in London Stock Exchange listings... the same time zone, speaking the same language and using the same currency. Guernsey also boasts a longstanding financial services industry with banking, private wealth, investment funds and insurance sectors supported by a network of professional services, including multi-jurisdictional law firms and global accountancy practices with specialists advising on London Stock Exchange listings.

They work in a regulatory and legislative environment which has been proven through the years to offer high standards while retaining speed and simplicity for Guernsey clients. It is this framework which means Guernsey remains a jurisdiction of choice for listings on the markets of the London Stock Exchange.

Guernsey is a leading jurisdiction for establishing vehicles listing on the London Stock Exchange.

The Island’s experience has developed the infrastructure and expertise which make it quick and easy to access capital markets. This reputation means that Guernsey remains the first choice of many professionals considering where to domicile their listing vehicles. Guernsey entities are spread across the London Stock Exchange’s Main Market, AIM and SFM and range from major corporations through to niche investment vehicles, including a significant number of investment funds.

Existing and new fund promoters are particularly attracted to Guernsey by its reputation for servicing closed-ended listed structures, including private equity however, Guernsey listed structures can be used for a wide variety of purposes. The Island also has a hallmark innovation in the capital markets, with vehicles being used to attract investment into niche asset classes such as Insurance Linked Securities (ILS). PO Box 655, North Plantation, Guernsey is renowned as a good home for vehicles which are established for St Peter Port, Guernsey, GY1 3PN raising capital to invest into infrastructure projects. It is this experience and expertise which has led to Guernsey becoming the first port of call for fund Phone: +44 (0) 1481 720071 managers seeking to raise funds from the capital markets for investing into Email: [email protected] emerging economies, for example the Far East, Russia, Latin America and India. Web: www.guernseyfinance.com

LSE A3.indd 1 5/7/2014 4:38:10 PM

Section 4 Post Trade 62 Section 4 London Stock Exchange Group plc Yearbook 2014

The mechanics of post trade

CLEARING AND SETTLEMENT ARE GOING THROUGH A PERIOD OF RAPID CHANGE – AND LONDON STOCK EXCHANGE GROUP’S CLIENTS ARE EXPECTED TO BENEFIT, AS DAVID TURNER EXPLAINS.

learing and settlement used to be considered “VaR is a more precise and efficient way of calculating the nuts and bolts of financial markets – routine, risk, which generally means that equivalent risk positions Cpredictable and a teensy bit dull. No longer. Ever have slightly lower margins, yet it maintains appropriately since the financial crisis, regulators have been focused conservative assumptions,” says Pravetonni. on these activities, anxious to improve the way trades are settled and processed so as to reduce systemic risk. European opportunities Cassa di Compensazione e Garanzia (CC&G), LSEG’s Italy- LCH. Clearnet Group (LCH. Clearnet), part of London based clearing house, is also well placed to benefit from Clearing is a Stock Exchange Group (LSEG), is at the forefront of these developments in the post-trade environment, particularly complex task. If developments. Its subsidary clearing house, LCH. Clearnet the EU’s European Market Infrastructure Regulation (EMIR) clearing houses do Ltd and LCH Clearnet SA sit in the middle of trades on their directive. It stipulates that a clearing obligation will apply not request enough respective platforms. If either party defaults on the trade, to a number of over-the-counter (OTC) derivatives (to be margin, in a crisis the clearing house takes on the defaulter’s risk and becomes determined by ESMA 2014), that would previously have market a clearing accountable for its liabilities. To reduce risk for participants and being cleared by agreement between the two parties to the house may be increase certainty they contribute margin and default fund original trade. unable to provide payments. The pool of assets collected as margin or default the protection its fund contributions provide the financial back-stop required to “As a CSD, Monte Titoli is the third largest in Europe with members expect. manage the default of a member in an orderly way. over 3.3 trillion euros of Assets Under Custody offering If clearing houses pre-settlement, settlement and custody services; and the request more margin Clearing is a complex task. If clearing houses do not request strong, existing knowledge and experience within the Group than is necessary, enough margin, in a crisis market a clearing house may gives us significant appeal to customers,” Paolo Cittadini, counterparties’ be unable to provide the protection its members expect. If Chief Executive of CC&G and Monte Titoli says. margin is tied up. clearing houses request more margin than is necessary, counterparties’ margin is tied up. Monte Titoli is responding to new opportunities in the post-trade market too. It is anticipated that from the For many years a typical model among clearing houses second quarter of 2014, the CSD will be offering full- for calculating margin requirements has been the SPAN fledged collateral management triparty services through (Standard Portfolio Analysis of Risk) approach, which its X-Com platform. calculates the appropriate margin for each transaction. LCH. Clearnet however has recently been moving towards “Monte Titoli’s collateral service is part of its strategy to the use of VaR (Value at Risk) for calculating margin, and offer a single point of entry for multiple platforms, and away from the old SPAN-based approach. allowing our customers to efficiently serve their portfolio through a single provider,” says Alessandro Zignani, Head of “The use of VaR margining creates a consistent risk Post Trade Sales at LSEG. management methodology across a range of asset classes cleared at LCH. Clearnet,” says Alberto Pravettoni, CEO of Repo The development is needed now. Regulators are & Exchanges business at LCH. Clearnet. “It is used for our determined to improve the stability of the financial OTC derivatives clearing services, including our interest rate system so margin requirements are increasingly swap clearing service, SwapClear. We also use it for a number stringent. The EU, for example, is considering whether of our exchange-traded services, including equities clearing to limit the length of transaction chains, formed through EquityClear; NLX, the new London trading venue for when traders who receive collateral in turn use the interest rate derivatives and Nodal, the North American Power same securities to back separate trades. In such an Exchange. In addition, we will be moving to a VaR-based environment, banks are under pressure to use their methodology for our fixed-income and repo business. collateral in the most efficient way possible. London Stock Exchange Group plc Yearbook 2014 Post Trade 63

VaR is a more precise and efficient way of “calculating risk, which generally means that Section 4 equivalent risk positions have slightly lower Post Trade

margins, yet it maintains appropriately conservative assumptions. €3.3tr

The amount of Assets Under Custody at Monte Titoli, which offers pre-settlement, settlement and custody services. 64 Section 4 London Stock Exchange Group plc Yearbook 2014

By using their settlement service provider as their “collateral manager, customers may be able to maximise the use of their assets, both domestic and foreign, because they can use securities as collateral as soon as a transaction is settled in accordance to their funding needs.

“By using their settlement service provider as their collateral manager, customers may be able to maximise the use of their assets, both domestic and foreign, because they can use securities as collateral as soon as a transaction is settled in accordance to their funding needs,” he adds.

More settled Besides branching out into new services such as collateral management, Monte Titoli continues to focus on its core function of settling trades. At 98 per cent, its settlement rate is one of the highest in the world, an achievement maintained at least in part through a consistent focus on innovation.

Major US bank JP Morgan announced in 2013 that it was to be one of the first users of London Stock Exchange Group’s new central securities depository in Luxembourg. This was a vote of confidence for the new settlement capabilities given that JP Morgan’s collateral management business, one of the largest included all the transactions that counterparties have in the world, would use the new CSD, expected to be made with each other.” operating by the first half of 2014, for settlement, custody and asset servicing. Monte Titoli extracted all the transactions affected by the default from its settlement system and worked Cittadini attributes Monte Titoli’s high success rate for the phones to make sure all customers’ remaining settlement not just to technology, but also to constant positions were closed by substituting other trades. The monitoring of client and market activity. firm achieved this within two days.

“Customers trading through us know that we are looking Cittadini believes the advent of Target2-Securities (T2S), at their behaviour very carefully, and actively managing the new pan-European securities settlement system the right securities for each trade,” he says. scheduled to go live in 2015, will reduce the effect of similar shocks in the future. By shortening the interval Proof that this eagle-eyed supervision works well came between trade and settlement from three days to two, it to the fore during the financial crisis of 2008, when a will minimise the number of trades left in the system by well known US investment bank collapsed and defaulted a counterparty after its collapse. T2S is also expected to on huge numbers of trades. reduce the cost of cross-border securities settlement in Europe. By making settlement more truly international, “If a big player defaults, you really need to be able to it will increase the opportunity for Monte Titoli and understand all the positions of its counterparties,” says CC&G to continue their expansion beyond Italy. The Cittadini. “That was possible because our database future for both entities looks increasingly bright. n London Stock Exchange Group plc Yearbook 2014 Post Trade 65

It’s all becoming clear

CLEARING HOUSES ARE BECOMING A KEY RISK MANAGEMENT TOOL FOR TRADING FIRMS. AND THEIR ROLE IS SET TO EXPAND SIGNIFICANTLY OVER THE COMING YEARS, AS LUKE JEFFS EXPLAINS. Section 4 Post Trade

he collapse of Lehman Brothers prompted a global European Market Infrastructure Regulation (EMIR) reforms. reassessment of financial markets. Derivatives came Tunder particular scrutiny, and in 2009 G20 leaders Historically investors such as asset managers, hedge funds pledged to initiate change. and insurers traded swaps bilaterally with investment banks and specialist brokers, meaning they were exposed to the Since then, US regulators and their European peers have risk that their counterparty might go bust and default on been working on plans to force the most popularly traded any outstanding trades. OTC derivatives, interest rate swaps, to pass through clearing houses. But the demise of Lehman Brothers in 2008 and futures broker MF Global in 2011 brought these dangers to the fore US regulators took the lead on implementation. In September and convinced regulators that more traded markets need to 2013, the Commodity Futures Trading Commission (CFTC) use clearing houses to manage their risks. completed a phased roll-out of swap clearing for banks, hedge funds and other financial institutions. And just one Clearing houses demand deposits from trading firms, which month later, the Commission forced hedge funds that trade are held to ensure that no firm is left out of pocket by the the US markets from outside that jurisdiction (typically the collapse of another firm with which it has traded. Cayman Islands) to also start clearing. Firms that clear their trades are effectively replacing their For its part, the European Commission plans to introduce exposure to their trading counterparty with exposure to the swap clearing in late 2014 or early 2015, through its clearing house, also known as a central counterparty (CCP). 66 Section 4 London Stock Exchange Group plc Yearbook 2014

Delivering long-termClient clearing has been growth growing steadily, as “trading houses have started using it to tackle the risk of a counterparty default and prepare for WHEN COMPANIES CONSIDER HOW BEST TO EXPAND THEIR BUSINESS,forthcoming THEY ARE FACED regulation. WITH A NUMBER OF OPTIONS. BUT LISTING ON LONDON STOCK EXCHANGE CAN PROVIDE THE MOST REWARDING LONG-TERM SOLUTION, AS HEATHER CONNON EXPLAINS.

Thanks to regulatory change in Europe and the US, all In 2008, only a fifth of US-issued interest rate swaps were cleared. trading firms, including fund managers, hedge funds By the end of 2013 more than half were being cleared, equating and insurers, will now be responsible for clearing their to $180 trillion of a $330 trillion market. The CFTC expects this own trades. level to hit two-thirds in 2014 and rise still further after that.

Global policymakers are also seeking to make central “The regulation in the US applies to newly issued swaps but clearing via a CCP more attractive to trading firms through we are seeing clients clearing their existing contracts also. other initiatives such as Basle III, the regulatory standard Central clearing is obviously here to stay and clients do not on bank capital adequacy, which makes cleared trades want to maintain two operational processes for one set of cheaper to process than those that are not cleared. products,” says Maguire.

First steps European policymakers are still working on their EMIR Client clearing, as it is known, has actually been available clearing rules and the use of client clearing for swaps is still since 2009 when LCH. Clearnet, now part of London Stock voluntary but there are already early adopters, specifically Exchange Group, became the first CCP to allow asset larger hedge funds, asset managers and regional banks, managers, hedge funds and smaller banks to clear their looking to implement and test their new clearing processes swap trades directly with the central counterparty itself. ahead of the regulatory deadline.

And client clearing has been growing steadily since then, as trading houses have started using the service both to tackle the risk of a counterparty default and to prepare for forthcoming regulation. 2008 The introduction of US rules mandating clearing for new swaps (already issued swaps are exempt) was the biggest boost for client clearing however. The year in which only “LCH. Clearnet saw client clearing activity consistently intensify in the run-up to each of the CFTC’s various clearing a fifth of US-issued deadlines in 2013,” says Daniel Maguire, head of Swapclear interest rate swaps US, the North American arm of LCH. Clearnet’s global clearing service for interest rate swaps. were cleared. London Stock Exchange Group plc Yearbook 2014 Post Trade 67

“In Europe, most clients are not yet clearing because to support the process and select a clearing broker there is no mandate to do so but once the European to facilitate clearing on their behalf. Under the new implementation dates are known I expect there will rules, clients will also have to give up a significant be a very different picture, with clients looking to amount of control to their clearing brokers, which

get ahead of the game through the end of 2014 and can represent a psychological challenge. Section 4 Post Trade into 2015,” says Gavin Dixon, global co-head of fixed income clearing at BNP Paribas. “Currently firms are selecting and on-boarding their

first clearing brokers but they are not yet clearing all Preparing for change of their business because it is more expensive to Client clearing is no small undertaking, however. do so. This is going to change though as regulation Asset managers, hedge funds, regional banks and impacts non-cleared trades also,” says Dixon. insurers looking to start clearing for the first time are faced with a range of legal, technical and commercial The world’s top clearing houses have been developing challenges. new solutions to appeal directly to this new user community, improving their liquidity and collateral Firms are required to redraft legal agreements with management services to support increased clearing. trading counterparties, implement computer systems In late 2013, for example, LCH. Clearnet agreed to work with global message network Swift to streamline the passage of collateral messages between the clearing house and its clients.

The reforms to mandate client clearing of swaps may have taken time to become law, but US investors are 2013 now working through its implications while European clients are starting to come to terms with the implications of this new regime. The year that more than “Given that global dealers and the US market are now half were being cleared, mandated to clear swaps, the part of the market that equating to $180 trillion is not clearing has shrunk further and this is only going to continue. The market is nearing a tipping of a $330 trillion market. point on clearing,” says Maguire.n 68 Section 4 London Stock Exchange Group plc Yearbook 2014 Settlement, the next frontier

TRADE SETTLEMENT IS BEING TRANSFORMED BY NEW RULES AND MARKET STRUCTURES, CREATING OPPORTUNITIES FOR INNOVATION.

ost-trade is experiencing radical change amid a first-wave participant; accordingly it is anticipated that it will dramatically shifting landscape. The European Central migrate onto T2S in June 2015, ahead of many other CSDs. P Bank’s (ECB) Target2 Securities project together with the forthcoming CSDR will establish in the next few In late 2012, the ECB asked for banks to indicate with a years a renewed competitive environment among Central non-binding commitment whether or not they intended to be Securities Depositories (CSDs), International Central Securities directly connected with T2S rather then indirectly through a Depositories (ICSDs) and custodian banks. CSD. The deadline was 15 October 2013 and 32 legal entities have made the commitment to use T2S. T2S is a centralised settlement platform designed by the ECB which aims to provide CSDs across the European Union with a Cittadini believes T2S will have a major impact on Monte Titoli harmonised settlement service, decreasing settlement costs and the wider market. and increasing harmonization and efficiency. It represents a groundbreaking change which will reshape the post-trade, by “T2S has the potential to dramatically affect our business as bolstering opportunities and competition beyond national borders. it will create conditions to enable cost reduction for clients, enhanced services, all furthering the competition in this London Stock Exchange Group (LSEG) has long been committed to space,” he says. “The settlement business will be important increasing the competitiveness of the European capital markets in offering custody and collateral management services in a and as such has supported the ECB in the implementation and larger playing field, including 24 providers who will join the development of the new platform. The decision to invest in the new platform. The union of these three services – settlement, first wave of T2S for 1 June 2015 through Monte Titoli further custody and collateral management – will be what each CSD demonstrates this. Monte Titoli, as a CSD, is well positioned must look at in order to decide on its future.” and equipped to support customers through its knowledge and expertise with more than €3.3 trillion of securities under custody, New opportunities 42,000 financial instruments served as issuer CSD and 50 million For all of these opportunities, the level of change is novel and trades settled per year for 400 customers, which include many unprecedented. The CSD Regulation (CSDR) will begin to come into major international financial institutions. effect this year, and by 2015 CSD functions will be harmonized across Europe, including the imposition of a T+2 settlement period. Ahead of the launch of T2S, LSEG also announced in July CSDR will also enable a ‘passport’ system so that CSDs can offer 2013 that it was developing a new CSD based in Luxembourg, their services in countries other than their own. expected to go live in the first half of 2014. Any bank-related activity, such as re-hypothecation and First wave securities lending, will have to be managed under a separate The new T2S settlement platform is seen as an opportunity entity, subject to regulations such as Basel III. As this will to partner with international customers, helping to provide increase the costs of that business, firms may look for smooth transition to the new environment and allowing partnerships with customers before providing asset servicing. them to take advantage of early entrance. T2S is expected to provide a range of benefits to users including liquidity Cittadini is optimistic about the future. “For a long time optimization, enhanced collateral management, efficiencies Monte Titoli had been in the position of being one of the most from harmonization of procedures and much more. competitive CSDs in Europe, but not able to fully export offerings because the legal systems of other countries prevented it. Monte Titoli chose in 2011 to be the first CSD to embrace the Now we can, and competition between CSDs will become even T2S concept by announcing its intention to participate as greater,” he says. n

Section 4 Post Trade 69

Trade Post

For a long time Monte Titoli has been one has Titoli Monte a long time For but we Europe CSDs in of the competitive level of to export our not in a position were Now we can. efficiency. “ 2014 plc Yearbook Group Stock Exchange London 70 Section 4 London Stock Exchange Group plc Yearbook 2014

Meeting the regulatory challenge

ENSURING REGULATORY COMPLIANCE IS NO SMALL FEAT THESE DAYS. BUT UNAVISTA, PART OF LONDON STOCK EXCHANGE GROUP, HELPS CUSTOMERS TO KEEP UP TO SPEED, AS LYNN STRONGIN DODDS EXPLAINS.

naVista is London Stock Exchange Group’s global help foreign financial institutions identify US taxpayers hosted platform for all matching, validation and determine the annual closing balances of Foreign U and reconciliation needs. Offering an integrated Account Tax Compliance Act (FATCA) eligible accounts approach across different asset classes and regulations, it prior to the disclosure deadline. helps customers comply and navigate the ever-changing financial services landscape. Help with MiFID UnaVista provides essential services relating to the ”We have three post-trade pillars that all leverage the Markets in Financial Instruments Directive (MiFID) too. UnaVista UnaVista reference platform,” says Mark Husler, CEO In 2011, LSEG acquired the Transaction Reporting Service processes 1.5 billion of UnaVista at London Stock Exchange Group (LSEG). (TRS), the FSA’s Approved Reporting Mechanism (ARM), trades per year for “These include transaction reporting, trade confirmation which was developed to provide firms with a method for 700 customers under and matching between brokers and clients or our meeting their MiFID reporting obligations. Following this, MiFID reporting reconciliation services. One of the main benefits is that UnaVista can now not only identify which of its clients’ requirements. clients only need one log-in and not several for the transactions are eligible for transaction reporting, but also different functions.” carry out the reporting itself.

“Most of the conversations we have today are about The ‘hub and spoke’ technical infrastructure of UnaVista regulation because there are so many new mandatory allows LSEG to migrate its TRS clients on to its platform requirements and people are looking for a solution with no negative effect on processing performance. The provider that can deliver solutions across multi asset platform also delivers information in any format, while its classes and regulations, whether it is European Market auditing and reporting dashboard enables firms to get a Infrastructure Regulations (EMIR), Alternative Investment detailed picture of that information. Fund Management Directive (AIFMD), or Financial Transaction Tax (FTT),” he adds. All clients were on-boarded and reporting within the six- month timescale. Today, UnaVista processes 1.5 billion The UnaVista Rules Engine acts as a central hub for trades per year for 700 customers under MiFID reporting the production of data, helping clients meet legislation requirements while a number of the new clients have requirements by extracting data from multiple internal taken advantage of UnaVista’s additional services, such sources and validating it using their own reference data as replay and reconciliation solutions, global and MiFID and rule logic. The information is then normalised, targeted reference data and the confirmations platform. converted and sent to the relevant regulators. The Rules Engine can, for example, calculate a firm’s net short Data storage position in each relevant instrument and provide a This wealth of expertise means that UnaVista is well graphical overview of positions for short selling rules, while placed as one of the four trade repositories (TRs) under at the same time highlighting securities that are liable EMIR. The registrations took effect on 14 November 2013 under the FTT in the jurisdictions where a firm operates. and trade reporting was set to start in February 2014.

Data can also be consolidated and the correct assets TRs are responsible for storing data related to derivatives under management can be calculated for those having to trades, that can be easily accessed by regulatory meet the AIFMD. And UnaVista systems can be used to authorities including national regulators, the European London Stock Exchange Group plc Yearbook 2014 Post Trade 71 Section 4 Post Trade

MTS Pattern_5a

72 Section 6 London Stock Exchange Group plc Yearbook 2014

MTS Swaps A community of banks and investors unite. Be part of it.

MTS Swaps – gives clients anonymous access to For more information and to join the multi-dealer liquidity via a sponsor dealer MTS Swaps community speak to our expert team. – is a fully regulated multilateral trading facility for clients in the evolving Swap Telephone: +44 (0)20 7797 4090 regulatory landscape Email: [email protected] – supports the full trade lifecycle from Website: mtsmarkets.com pre-trade price discovery, execution, clearing and reporting.

MTS_0460_Swaps_PrintAd_V3.indd 1 06/11/2013 19:21 London Stock Exchange Group plc Yearbook 2014 Regulation and Governance 73

The UnaVista Rules Engine acts as a central “hub for the production of data, helping clients meet legislation requirements by extracting data from multiple internal sources and validating it using their own reference data and rule logic.

Securities and Markets Authroity (ESMA), the European We have seen a positive response from customers using Systemic Risk Board and European central banks. Each our test environment and many have already signed up to trade report requires around 85 pieces of data and some our trade repository.” have to be reported up to eight times, depending on the number of intermediaries involved in a transaction. UnaVista has also tapped into LSEG’s proficiency as the Participants also require a legal entity identifier UK’s National Numbering Agency for ISINs and CFIs (LEI), identification codes that enable consistent and reference data in its role as an authorised Pre-Local accurate identification of all legal entities that are Operating Unit (LOU) for the global allocation of Pre-LEI. parties to financial transactions, including non-financial Endorsed by the Regulatory Oversight Committee (ROC), institutions. the platform provides an advanced look-up service to access all Pre-LEI reference data in one database plus the Preparing for the new rules required considerable effort ability to view, filter, manipulate and extract data which across the market but UnaVista focused on making the has been consolidated through a single tool. “One of the transition as seamless as possible. biggest challenges is not the technology but getting firms to get their LEIs,” says Husler. Regulation and Governance “UnaVista called on its experience with MiFID to assist its customers to be ready for the February go-live As with all regulation, the green light to be a TR and date,” says Husler. “Unlike our competition, we already offer LOUs is only the first step on a long road. As had a constructed data model so the system could be Husler notes, “We are currently waiting for the technical Section 6 configured quickly and clients could place their data standards to be finalised under EMIR but look at MiFID: into the Rules engines. There are also a lot of similarities it was adapted differently in each country and the between MiFID and EMIR in that they are both T +1 regulation continues to evolve. The same will be true regimes plus they both cover exchange traded as well OTC with EMIR which is why it is important to be nimble and asset classes. They also both require on-boarding clients. have a flexible platform.” n

Section 5 Capital Markets Technology 76 Section 5 London Stock Exchange Group plc Yearbook 2014 Section 5 Capital Markets Technology 77 Technology Markets Capital

MILLENNIUMIT IS ONE OF THE WORLD’S LEADING DEVELOPERS OF DEVELOPERS LEADING WORLD’S MILLENNIUMIT IS ONE OF THE BY LONDON SYSTEMS. ACQUIRED TRADING HIGH PERFORMANCE IN 2009, THE BUSINESS HAS GROWN STOCK EXCHANGE GROUP (LSEG) INSTITUTIONS AROUND SUPPLIES FINANCIAL AND NOW EXPONENTIALLY WILLIAM HALL REPORTS. THE WORLD. MillenniumIT: stability and success and stability delivering speed, delivering 2014 plc Yearbook Group Stock Exchange London 78 Section 5 London Stock Exchange Group plc Yearbook 2014

IN NUMBERS MillenniumIT is not “only one of the fastest 1996 platforms in the world but The year that MillenniumIT was founded by Tony Weeresinghe, it has one common set an entrepreneurial Sri Lankan software developer. of tools and technologies which underline all of its 10x MillenniumIT’s flagship product, applications and can be Millennium Exchange - at least 10 times speedier than TradElect. accommodated on the same platform. That is a unique £10m The cost-savings per year London differentiator for us. Stock Exchange made converting from TradElect to MillenniumIT’s flagship product, Millennium Exchange. SEG chief executive Xavier Rolet was appointed in May 2009 and the acquisition of MillenniumIT was one of his first moves. LNow considered a great success, it was not without risk at the 700 time. Founded in 1996 by Tony Weeresinghe, an entrepreneurial Sri Staff numbers have increased to Lankan software developer, MillenniumIT’s 450 staff and intellectual almost 700 at MillenniumIT. property were based in a country where a 27-year civil war had ended just months before.

However, LSEG’s Tradelect platform was under threat as more 20%+ nimble, speedier trading systems were proving more attractive to MillenniumIT’s annual revenue market participants and captured increasing market share. London growth. Stock Exchange Group needed a faster and more reliable trading platform, whilst MillenniumIT needed an internationally respected partner to help develop its global exchange technology business 30 with third parties. The number of capital markets to which MillenniumIT now provides It was against this background that the acquisition of MillenniumIT market infrastructure technology. took place. It has two core businesses: systems integration, and proprietary capital markets software products.

TradElect, London Stock Exchange Group’s old electronic trading 2012 system, was quickly replaced by MillenniumIT’s flagship product, The year that MillenniumIT Millennium Exchange. At least 10 times speedier than TradElect, technology went live at exchanges Millennium Exchange also produced immediate cost-savings of at on three continents. least £10 million a year.

Turquoise, LSEG’s pan-European Multilateral Trading Facility (MTF) now has an average latency (the time delay between initial input and output of an order) of 99 microseconds (1 microsecond = 1 millionth of a second), and latency of the UK cash equities platform is 106 microseconds. Section 5 Capital Markets Technology 79 Technology Markets Capital In 2012, MillenniumIT technology went live In 2012, MillenniumIT technology went live In Europe, continents. at exchanges on three Italiana’s cash equity and fixed income Borsa to Millennium Exchange migrated markets to Milan). In London (and switched from Stock Exchange Africa, the Johannesburg to Millennium Exchange and migrated Surveillance, and in Asia the Mongolian Stock MillenniumIT Exchange went live with three surveillance and central trading, for platforms securities depositary. Since then, MillenniumIT has serviced a of new clients, including roll-call growing onto its trading which migrated Oslo Børs, Malaysia, which Millennium Exchange; Bursa is using MillenniumIT’s surveillance system; Metal Exchange, which and the London has adopted a MillenniumIT compliance monitoring system. clearing house has central The Austrian clearing chosen MillenniumIT’s PostTrade clearing cash for and settlement platform Exchanges whilst Hong Kong trades, market installed and Clearing (HKEx) has recently technology router MillenniumIT’s smart order community, highlighting the its trading for system’s “capability to handle a high level of levels of with microsecond throughput order latency and high availability.” New markets, new products new markets, New LSEG’s own Not only has MillenniumIT revolutionised market but it now provides performance, trading technology to over 30 capital market infrastructure stock exchanges to traditional from clients, ranging securities depositories. and central inter-dealer brokers number of The business has developed an increasing and services too, including products capital markets latency, flexible and Millennium SOR (ultra-low (high Millennium Gateway routing), intelligent order Millennium connectivity platform), performance for financial and efficient data (ultra-fast MarketData multi- Millennium Surveillance (real-time, markets), monitoring and compliance), Millennium market clearing, settlement, cross-asset (real-time, PostTrade risk and CSD solutions) and Millennium LiveOps capital market for IT operations (high availability than the for much more cater firms). These products covering the trading cash equity markets, traditional of multiple asset classes including requirements exchange, debt, commodities, foreign derivatives, funds. and exchange-traded products structured The benefits of this surge in speed are widespread, widespread, in speed are The benefits of this surge staff where and MillenniumIT, LSEG customers both for to almost 700 and revenues increased have numbers The per year. than 20 per cent at more growing are purpose-built opened a third has also recently Group campus, named after Alan building on its 19.5-acre of British computing. the inventor Turing, 2014 plc Yearbook Group Stock Exchange London 80 Section 5 London Stock Exchange Group plc Yearbook 2014

The World’s most Not only has MillenniumIT international exchange “revolutionised LSEG’s own trading performance, but it now provides market infrastructure technology Six-year high for MillenniumIT is a smaller business than SunGard Global to over 30 capital market Technology, where Gill was responsible for over 4,000 staff worldwide, but it was MillenniumIT’s cutting edge clients around the world. approach to software engineering and design that London Stock attracted him to his new role.

“Clients are seeking solutions based on connectivity and platforms that can provide very rapid straight MillenniumIT’s early growth was built on supplying through processing. MillenniumIT is not only one of the Exchange IPOs systems to emerging markets in Asia and Africa. fastest platforms in the world but it has one common However, it has recently begun to make inroads into set of tools and technologies which underline all of its several of the fastest growing markets in Latin America. applications and can be accommodated on the same It has been selected as the business development platform. That is a unique differentiator for us,” says Gill. and technology partner by the Argentinian Central Securities Depository, and Bolsa de Valores de Lima, MillenniumIT’s systems are also praised for their — 105 IPOs raise a total £15.7 billion in 2013 Peru’s stock exchange. reliability. — 62 AIM IPOs raise £1.1 billion Singapore Exchange (SGX) has also recently signed up “Speed is extremely important. But what is becoming as as the first major client of the full Millennium PostTrade important is stability and reliability. The ability to have — Strongest year for technology IPOs since 2007, platform for complete post-trade processing in real- a combination of very fast but also very stable systems time, which signals MillenniumIT’s commitment to the is something we are truly proud of,” says Gill. 36 firms raise £1 billion fast evolving clearing and settlement market. Antoine Shagoury, LSEG’s chief operating officer, Growth ambitions describes MillenniumIT’s trading and settlement The rapid growth in MillenniumIT’s business with third systems as “providing the lead-in, glue and delivery www.lseg.com party customers has demonstrated that its low latency arm for a range of other LSEG services.” The recent platforms appeal to a growing number of capital market acquisition of the LCH. Clearnet, for example, offers clients around the world. Even more important, its plenty of potential for MillenniumIT to adapt its ultra- technology has quickly become a cornerstone of LSEG’s low latency technology to new areas, such as providing efforts to diversify and grow its business. systems that manage collateral in real-time trading.

The Group has underscored its ambitions for It is clear that MillenniumIT’s low cost, flexible, resilient MillenniumIT with the appointment of Mack Gill as technology is playing a key role in supporting the LSEG chief executive. A senior executive with SunGard Data ambition to transform itself into one of the world’s Systems, one of the world’s leading financial software leading global market infrastructure businesses. As technology firms, Gill was hired in May 2013 to take LSEG CEO Xavier Rolet explains: “MillenniumIT more over from founder Tony Weeresinghe. than fulfilled our expectations.” n London Stock Exchange Group plc Yearbook 2014 Capital Markets Technology 81

The World’s most international exchange Six-year high for London Stock Exchange IPOs

— 105 IPOs raise a total £15.7 billion in 2013 — 62 AIM IPOs raise £1.1 billion — Strongest year for technology IPOs since 2007, 36 firms raise £1 billion Capital Markets Technology www.lseg.com Section 5

82 Section 5 London Stock Exchange Group plc Yearbook 2014

Innovation highway

CONNECTIVITY AND CO-LOCATION ARE CHANGING FAST IN TODAY’S CAPITAL MARKETS. LONDON STOCK EXCHANGE GROUP IS AT THE FOREFRONT OF INNOVATIVE TECHNOLOGY AND PROCESSES, AS ADAM COX REPORTS.

magination is more important than knowledge,” Albert Einstein once said. The maxim has not been I lost on London Stock Exchange Group, which has made technological innovation a cornerstone of its strategy, The fruits of that approach can be seen in two areas of recent focus: connectivity and hosting. 2013

In November 2013, London Stock Exchange launched the first directly connected wireless communication The year that LSEG launched link between its City of London data centre and the the first directly connected Equinix data centre campus in Slough. The millimetre- wave wireless technology being used is similar to wireless communication microwave, but while both technologies offer big savings in latency compared with traditional fibre-optic networks, link between its City of millimetre-wave technology has certain key advantages London data centre and the over microwave. Equinix data centre campus. “We did an extensive comparison and evaluation exercise involving a number of technologies but the millimetre- wave solution offered higher aggregate bandwidth and therefore greater flexibility for customers,” says Nigel Harold, Head of IT Business Development at London Stock Exchange. 40% One of the main drawbacks of microwave is that it is less suitable for data-intensive trading strategies or transmitting large volumes of real-time market data. Where microwave The percentage of expected typically offers channels in the low hundreds of megabits latency savings versus per second, London Stock Exchange’s new wireless service provides channels in bandwidths of 1 gigabit per second. traditional fibre-optic. Section 5 Capital Markets Technology 83

Technology Markets Capital “The beauty of doing it was coupling an exchange coupling an exchange “The beauty of doing it was unique,” that was with high technology in a way Chief Executive Jay says NexxCom Wireless is taken done here “What we have Lawrence. technology that NexxCom has some radio and put it years developed over the last several which will low latency circuit, into an extremely ever to Slough and be the lowest latency circuit Stock Exchange.” London in the sky. wire got a path that is pure “We’ve 1. It’s using some highly It’s all OSI Layer managing the technology for innovative access. customers’ bandwidth and shaping it for driven by managed to put in a network We’ve technology into an powerful some extremely application that makes it a one of a kind in he adds. the market,” We’ve got a path that is pure wire in the wire that is pure got a path We’ve to put in a network managed sky. We’ve powerful driven by some extremely technology into an application that makes it a one of a kind in the market. Additional links along the network also create a a also create links along the network Additional optimised path, which cuts latency more straighter, tests indicated the expected latency savings further: as much as 40 per were fibre-optic traditional versus too, links build in added resilience cent. The extra due to external factors which means that disruption such as weather is less of a threat. was to go down this route “One of the key reasons the wireless for to maximise the reliability to try explains. “By shortening the Harold network,” distances between the links, that allows you to better manage the signal attenuation, which makes it a lot weather conditions.” in terms of adverse robust more than in little more delivered was The new offering with nine months and implemented in partnership NexxCom Wireless. “ 2014 plc Yearbook Group Stock Exchange London 84 Section 5 London Stock Exchange Group plc Yearbook 2014

London Stock Exchange “has begun evaluating new mechanisms for 2007 clients connecting This year that ASP became within the data centre part of the group following the merger with Borsa itself, a move that Italiana. could result in massive latency savings. The innovation came from London Stock Exchange and NexxCom but the catalyst was customer demand. The Group takes a collaborative approach with its customers on all projects, from identifying demand through to specifying requirements and understanding what issues matter most to customers.

“One of the main drivers was customers. That’s where wireless has evolved as a technology. So we looked at whether there is a trade-off between latency and availability and whether certain locations should be connected first. We’ve been engaged with them from the outset,” says Harold.

Tailored solutions This type of engagement plays a key role too in London Stock Exchange Group’s service X2M. X2M is the new brand for the services formerly called ASP which became part of the group following the merger with Borsa Italiana in 2007. Innovation is essential given that X2M’s business is based on providing bespoke managed service solutions.

Claudio Modenesi, Head of Integrated Technology Services for London Stock Exchange Group, says X2M approaches each customer’s needs as a unique opportunity requiring a customised solution. “That is a major challenge of our business because each new customer is actually a new project,” he explains.

X2M operates from Milan, Rome, Frankfurt and London, connecting customers to several trading venues including Borsa Italiana, London Stock Exchange, MTS, BATS Chi-X, Chicago Mercantile Exchange, e-MID, Eurex, Hi-Mtf, Liffe, LMAX Exchange, NYSE Euronext, TLX and Xetra. Over the years, X2M has become a collaborative ecosystem where different financial industry participants, including ISVs, brokers, and information providers, can work together. Section 5 Capital Markets Technology 85

Technology Markets Capital n X2M has becomeX2M has a collaborative where ecosystem financial different participants industry together. can work Hosting enhancements Stock Exchange Group’s Connectivity is a major part of London Another it only tells part of the story. but technology offering, in ways looking for always “We’re is hosting. important focus that clients take which we can enhance the co-location service explains. us,” Harold from about low-latency access but was mostly co-location first, At times. changed in recent priorities have in terms of a stronger over the years “I think we’ve evolved a lot more participants, a number of trading So you have community of users. who all need to service providers, participants, vendors, non-trading each other services,” says Harold. connect and provide to enhance some of the mechanisms by LSEG is looking at ways which can markets, which clients can connect into the Group’s the latency and the ‘jitter’, which is the distribution then reduce of latency. clients new mechanisms for LSEG has also begun evaluating a move that could result itself, connecting within the data centre in massive latency savings. of concept, but we on an internal proof still operating “We’re the customer hand-off latency from round-trip expect to reduce that’s on this to a gateway within one of our hosting facilities Head of says Nabeel Madry, by two-thirds,” distribution platform Stock Exchange Group. Services at London Network Group element of today’s connectivity is a crucial ultra-reliable Ultra-fast, is Stock Exchange Group London environment. capital markets customers determined to stay ahead of the game, providing likely to need in with what they need now and what they are the future. “X2M is always evaluating new ideas proposed by the community. by the community. new ideas proposed evaluating “X2M is always expand into other countries with new X2M looking to are We such as service with new offers, hubs and widen our portfolio says Modenesi. measurement,” performance “ 2014 plc Yearbook Group Stock Exchange London 86 Section 5 London Stock Exchange Group plc Yearbook 2014

Our solution is “particularly trader- friendly, as it allows users to trade and implement algorithmic strategies from the same interface without involvement from their IT department. This is a key differentiator. Section 5 Capital Markets Technology 87 Technology Markets Capital all Russian liquidity and LSEG International Order Book liquidity and LSEG International Order all Russian a single consolidated account. (IOB) stocks through 1 institution will soon deploy an ultra-low Another Tier adapter on the NSE, the risk software latency pre-trade a full offers GATElab where market, Indian derivatives methodology to including SPAN suite of risk protocols, never check option pricing, keeping the latency at a level seen before. latency gateways these ultra-low developing are “We ago defining only a couple of years in what we were an as developing countries, and this now seems quite established path,” says Falciani. in GATElab’s Two other topics coming to the fore its algorithmic trading are discussions with customers system. The algo-trading Routing engine and Smart Order into its and completely integrated engine is both powerful platform. trading as it allows trader-friendly, “Our solution is particularly and implement algorithmic strategies to trade users with only limited involvement the same interface from their IT department. This is a key differentiator, from of much lower the time-to-market because it can very It is of particular importance as we are a new strategy. which changes so quickly and our in an environment logic to to change their trading might have customers says Falciani. react,” is also system, meanwhile, Routing Smart Order GATElab’s ‘under the hood’ algorithms, which run based on advanced include Banca IMI, which logic. Users governing routing technology to connect to employing GATElab is currently and log evidence of best executions. OTC bond markets of technologies is beneficial not just to GATElab The range and complementing the but also to LSEG, broadening capabilities. Group’s ATElab is one of the newest additions to London is one of the newest additions to London ATElab (LSEG), joining in February Stock Exchange Group 2013 after selling a majority stake to the Group. It has a long history in its home market of Italy, however. of Italy, however. in its home market It has a long history than 20 years Established in 1989, it has spent more and solutions to meet products with customers providing needs. trading their electronic and Bank of Italy Back in 1991, the Italian Treasury government bond the country’s decided to electronify most other taken well before was The decision market. from involved was countries made the move, and GATElab its Italian customer base with an the start, providing platform. trading electronic additional business intelligence “Over time we introduced adding of the platform, over the basic initial configuration such as pricing and quoting systems, position features time,” says keeping and risk monitoring systems in real MD. GATElab Falciani, Stefano Since then, the company has developed a suite of multi- components aimed at buy trading asset, cross-market of spectrum These span the full and sell-side customers. execution tools. and trade pre-trade the functionalities on improving working currently are “We on concentration with a particular of these products, equities and derivatives, latency solutions for ultra-low multi-asset class algo solutions plus a comprehensive Falciani. says platform,” fixed income trading Emerging links Emerging its geographical is also broadening GATElab Capital, one of the bank Renaissance scope. Russian pre-trade is now using GATElab’s biggest brokers, country’s to the Moscow their customers to connect risk gateways with markets, and Forex Exchange cash equity, derivatives solution on top that increases margining a cross-asset capital efficiency, allowing them to cover their customers’ G

Russian bank Russian

Renaissance Capital, Renaissance one of the country’s is biggest brokers, now using GATElab’s risk pre-trade to connect gateways their customers to the Moscow Exchange cash equity, derivatives markets. and Forex TECHNOLOGY SPECIALIST GATELAB DELIVERS BROKERAGE AND DELIVERS BROKERAGE SPECIALIST GATELAB TECHNOLOGY SOLUTIONS PROVIDING PLATFORMS, TRADING PROPRIETARY BANKS, INSTITUTIONAL INVESTORS, TO CUSTOMERS INCLUDING IN 2013. OF LSEG PART AND EXCHANGES. IT BECAME JOHN BECK REPORTS.

A new gateway A new

2014 plc Yearbook Group Stock Exchange London 88 Section 5 London Stock Exchange Group plc Yearbook 2014

At a fundamental level, both GATElab and “LSEG share a number of key values and qualities, not least of which is innovation.

“The synergies with LSEG are quite obvious, as the “This is one of the fields in which we are making real numerous members of the various markets might find progress,” says Falciani. “To implement our technology one of our solutions beneficial to them and this may with complementary parts of the Group. We are in lead to a revenue stream increase for the Group,” says conversation with the other technological companies Falciani. within the Group in order to integrate our solutions and be able to cover completely the needs of our customers.” Global scope The alliance should also allow GATElab to benefit from GATElab relocated its offices to LSEG headquarters in LSEG’s international scope, an important consideration April 2013, a move that has allowed it to become closer given that its customer base is currently based to some of its peers and better understand the needs of primarily in Italy. their customers.

The group had begun looking further afield before it “Now, my office is in London Stock Exchange, so I’m a lot became a part of LSEG, however. In fact, Falciani joined closer to our customers and some of our counterparts – GATElab as it established its UK operations. one of which was once LSEG,” explains Falciani.

“We started to level up the business internationally At a more fundamental level, both GATElab and LSEG then, but of course we expect to have a big boost in this share a number of key values and qualities, not least direction because we now belong to an international innovation, which is central to the Italian firm’s ethos group,” he says. and LSEG’s.

Joining LSEG’s broad stable of companies is clearly “We are and have always been really innovative in our advantageous as GATElab can now work alongside solutions. It is in our DNA and LSEG’s DNA, so this was a providers of a range of different products, such as perfect marriage, and we are very proud to be part of the MillenniumIT or UnaVista, to satisfy the requirements Group,” says Falciani. n of LSEG customers. London Stock Exchange Group plc Yearbook 2014 Capital Markets Technology 89

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Section 6 Regulation and Governance 92 Section 6 London Stock Exchange Group plc Yearbook 2014 Good governance, good markets

ROBUST GOVERNANCE PLAYS A CENTRAL ROLE IN LONDON STOCK EXCHANGE’S EQUITY MARKETS, HELPING TO ENSURE THEY FUNCTION EFFECTIVELY AND RETAIN THEIR PRE-EMINENT POSITION. PHIL THORNTON REPORTS.

n 2013, UK equity markets were more active than Stock Exchange is an endorsement of your credibility and they had been in years. The flotation of Royal Mail governance structure vis-à-vis your investors, customers, London Stock Exchange I last autumn may have been the most high profile suppliers and regulators.” is one of the most diverse initial public offering (IPO) of the year but it was just exchanges in the world. one of 105 companies that floated on London Stock Companies that seek to list in London must meet standards Some 30 to 40 per cent Exchange during that period. expected of a London-listed company and set down by UK of IPOs come from regulatory authorities including the UK Listing Authority international companies Overall, IPOs and secondary share issues raised a total of (UKLA), part of the Financial Conduct Authority; the UK and many members of the £38 billion of capital, compared with £21.4 billion for the Corporate Governance Code and the Financial Reporting FTSE 100 index derive a whole of 2012, while the final quarter of 2013 alone was the Council. They must also satisfy directives from the large share of their best since spring 2009. European Commission. revenue from overseas, even if they are based in “The market is functioning well. London has been one of “That is beneficial as you have both a European imprimatur the UK. In that context, a the leading listing venues for many years and there’s a and the UK criteria that are seen as the benchmark of high governance regime that broad pipeline so we expect to see a diverse set of high standards. All of that goes to make up this unique blend of balances the needs of quality companies coming to market over the next six to high standards for companies seeking to raise capital in the issuers, investors and other 12 months,” says John Millar, Head of Primary Markets at UK,” says Denzil Jenkins, LSEG’s Head of UK Compliance & stakeholders is essential. London Stock Exchange Group (LSEG). Regulatory Policy.

London Stock Exchange is one of the most diverse Early engagement exchanges in the world. Some 30 to 40 per cent of IPOs are As companies planning to list in London need to understand the international companies and a significant proportion of the rationale and benefits of good governance, LSEG engages with companies listed derive a large share of their revenue from them and their advisers from an early stage in the process. The overseas, even if they are based in the UK. In that context, a Group organises seminars and roundtables looking at issues governance regime that appropriately balances the needs of ranging from boardroom diversification and corporate social issuers, investors and other stakeholders is essential. responsibility to the implications of the Bribery Act.

“There is a huge amount of appetite from international Issuers also benefit from the depth of professional businesses to list here,” Millar says. “Listing on London expertise and experience in London. Not only are there Section 6 Regulation and Governance 93 n and Governance Regulation year, designed to attract high growth, mid-sized UK and mid-sized UK and growth, high to attract designed year, to join the companies, which ultimately aspire European Segment are for this requirements List. Governance Official a or explain principles as for based on the same comply elements which LSEG sees as one of the Listing, Premium the However, underpinning the integrity of the UK market. of the businesses looking ownership and pre-IPO nature to full of them transition at HGS may mean that more than at IPO. compliance over time rather are AIM has no specific governance code but issuers by the Quoted guidelines produced to follow encouraged based upon key elements Companies Alliance with are to relevant Governance Code that are of the UK Corporate smaller quoted companies. issuers for level of standards “These balance an appropriate support level of liquidity and trading with the appropriate is a says Jenkins. “There investors,” for and protections which is coming to London, associated with hallmark seek to maintain.” something we always complemented by two and AIM are The Main Market Securities Market – the Professional specialist markets (SFM). The PSM Market (PSM) and the Specialist Funds the listing of capital through enables companies to raise receipts, specialist securities, including debt and depositary for dedicated market The SFM is a investors. to professional funds. equity and property such as private funds investment is of options, Millar says governance the range Across as the biggest change associated with the often perceived to public ownership. private from transition on the additional “Management teams can tend to focus than the benefits. The corporate and cost rather disclosure in the UK is actually designed to give governance regime to drive long-term companies the tools and framework nearly It doesn’t work sustainable business performance. as a box-ticking exercise,” when it is treated as effectively he explains. of the passed since the onset have than five years More for LSEG, one of the most global financial crisis, but still are markets is that capital striking lessons to emerge for businesses. of financing form the most effective the gained a number of insights from As Millar says: “We during business goes through that every soul-searching ahead, we will continue to innovate a downturn. Looking and we offer and markets both in terms of the products that underpins their success.” the governance regime Balancing act as a venue can choose Companies looking at London and AIM, each of which has its between the Main Market governance regime. own corporate and Standard both Premium includes The Main Market List. The both part of the UKLA’s Official Listings, based on the listings are standard for requirements listings while premium standards, common European rules, to additional ‘super-equivalent’ adherence require in the pool of capital available with a consequent increase following last year, in such securities. Late to invest announced a the UKLA consultation with stakeholders, rules, including number of modifications to its listing companies with majority for additional requirements minority further Designed to strengthen shareholders. focus the move highlights London’s protections, investors’ governance. on effective Segment last the High Growth LSEG also introduced numerous bankers and brokers operating in the City but but in the City operating and brokers bankers numerous insurers accountancy practices, of lawyers, a wide range placed to give advice on well firms are and public relations and how they interact expectations and investor market flotations. surrounding rules with the formal during and Such advice can be highly beneficial before, after an IPO. of a “One of the most important governance elements communication. The flotation is effective successful go to things don’t always community recognises investor is a plan and will accept that. But what it will not accept says Millar. dearth of information,” gives you access to the biggest on a public market “Listing The quid in the world. pool of permanent capital anywhere with investors to build trust quo is that if you want pro provide, and maintain ongoing access to the capital they that comfort to give the market to be prepared you have them about all issues and inform you will be transparent germane to the business,” he adds. have that companies and investors Acknowledging a one-size-fits-all needs, LSEG does not have different but not just among issuers is diversity There approach. in community, and investment also among the trading spread. terms of levels of risk appetite and geographical of the view that you need to be able to respond are “We to options available different by having to that diversity people,” says Jenkins. 2014 plc Yearbook Group Stock Exchange London Trade markets with high potential

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www.lseg.com/derivatives [email protected] [email protected] Trade markets with high potential

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www.lseg.com/derivatives [email protected] [email protected] London Stock Exchange Group 10 Paternoster Square London EC4M 7LS

+44 (0)20 7797 1000 www.lseg.com