Examination of Witnesses (Questions 40-59)
SIR BRIAN WILLIAMSON, MR HUGH FREEDBERG, MR JEAN-FRANÇOIS THÉODORE AND MR GEORGE MÖLLER
TUESDAY 22 JANUARY 2002
40. I do not know the answer to this point at all. You have one very powerful European competitor. Is this period of uncertainty going to lead to opportunities for competing in America?
(Sir Brian Williamson) Maybe I could answer that because one of the attractions to LIFFE is the European dimension. We have known experience, as the Committee is aware, of protracted delays in the United States in allowing LIFFE in particular into the United States. We still face this, in spite of some relief given two years ago.
41. Is this regulatory?
(Sir Brian Williamson) It is a muddled approach and very effective.
42. A deliberate muddle?
(Sir Brian Williamson) You are much better judges of that! The point I draw to your attention is that there is a huge distinction between the United States and Europe in stock markets and derivatives markets. In the United States consolidation in the underlying stock markets is mainly concentrated on the New York Stock Exchange and Nasdaq. In Europe there are many stock exchanges still. The derivatives exchanges in America are still very fragmented, whereas with this deal now in Europe, basically the big consolidation has taken place between these two exchanges: Euronext-LIFFE and Eurex. That potentially puts Europe in a very strong position. Also, and I think it is no coincidence, the two most advanced systems in the world that are taking order books around the world are the LIFFE system, CONNECT, now part of Euronext LIFFE, and the Eurex system - both European exchanges, both derivatives exchanges. The thrill and excitement of doing this deal I think from a LIFFE point of view is that it meant we were part of that very fast consolidation and it was our technology that actually got there. I think we have a big competitive edge there against the United States, which is sometimes not widely appreciated, and we are faced with obstructions to that at times.
43. We need to know about it.
(Sir Brian Williamson) You have been very helpful in the past.
Mr Tyrie: You are being slightly reticent in your language when you describe it. It would be very helpful if you were much more forthcoming. That seems absolutely crucial if it is going to be addressed.
44. Sir Brian, your frankness and bluntness will not take us any further regarding the obstacles in the United States.
(Sir Brian Williamson) Mr Freedberg is much more tactful than I am. We play a canny game and we can play a stronger game now perhaps in the European countries.
45. So the answer is "no", you are not telling us any more about the obstacles in the United States. We are very interested in that.
(Sir Brian Williamson) I misunderstood you. I am very happy to do that. The obstacle at the moment is that as soon as we announced that we wished to trade futures on single stocks right across the world, not only in Europe but also on American stocks, the Chicago exchanges saw this as a threat to their business. They are not allowed to do this in the United States within the securities regulations, stemming from, or made worse by, the split between the Securities and Exchange Commission, which looks after securities, and the Commodity Futures Trading Commission, which look after futures, and here you have a future on a security. So the Chicago exchanges then lent on Congress and in the last closing hours of the Clinton administration Congress instructed the CFTC and SEC to come up with rules to allow these products to be traded in the United States, to be completed by the end of the year or by 1 January this year. That has been postponed. Maybe it has been postponed because of the complexity of the issues or maybe it has been postponed because of a lack of interest or maybe it has been postponed for a whole variety of reasons. There is no immediate prospect of that being produced in a timetable that would suit us because we are moving on.
46. What are European governments doing to help?
(Sir Brian Williamson) That I do not know.
47. Sir Brian, perhaps you could send us a note on that aspect?
(Sir Brian Williamson) That would be very generous of you, thank you.
48. Before we go on to the consequences of the merger, can I go back with regard to the possible link between yourselves and LSE? It would appear to have been a good solution, in that it was local, it was horizontal and we had equity and derivatives markets combined. You did mention that Euronext was not the highest bidder but offered the best value. Could you expand on that, particularly in relation to LSE?
(Sir Brian Williamson) The value I can take merely from the price: it is how you value the difference between stock and cash. So that is what I meant by that, and we can certainly send you a much more detailed note on that if you felt that was cause for concern. We have no doubt about that with our advisers. I think the other point is what it did for the shareholders in terms of added value going forward in terms of the business really. I agree with you that the link between LIFFE and the London Stock Exchange could have brought some advantages, but I do not think they are anywhere near the scale of what we are looking at here. That is not to my mind a fault of the London Stock Exchange; it is just that the London Stock Exchange is an underlying market, one of the many underlying markets which LIFFE serves. It happens to be an underlying market with an exchange but, coming from that perspective, it is just an equity underlying market and a very small proportion of those large markets, a 120th I think, of the major markets in which we deal. So you have the £4,000 billion a day which we have to serve. We do it to the extent that we do about one-seventh or one-eighth of that business and only a very small proportion of that is in equities. It is also actually quite a small proportion of LIFFE's business as well. So it was necessarily really quite a modest proposal to put a derivatives exchange encompassing all those many markets together with an underlying equity exchange. I can see the value from the London Stock Exchange's point of view and it is well argued in their paper. From LIFFE's point of view, there was much greater value in going the way your own business was going with the technology that we had invented and the technology which we were running in-house. That is the attractiveness. I would not diminish the value of the Stock Exchange's proposal. I would like to emphasise the huge attractions that led very quickly to the unanimous decision by a board which was in the derivatives business. That was my point about value.
49. There was more potential in expanding the derivatives market with Euronext and thereby creating for their dominant position in Europe?
(Sir Brian Williamson) Yes.
50. Could I ask Sir Brian: if LSE had accepted your technology, the CONNECT system, would that have altered your view?
(Sir Brian Williamson) It would certainly have helped but I think my point is mainly one of scale and speed of movement. We were in the business and, as I have said, we had just had our business plan endorsed by our shareholders and large investors. It gave the route of winning in the derivatives world. You cannot imagine many more financial instruments to be invented in the underlying markets. They tend to be invented either in the over-the-counter market or in the derivatives exchanges market. That is why we have to keep up with that. That is why all our machinery is designed to do that. Of course it can deal with equities, and we think we could do a good fist of this with the people we have got but, in terms of comparison of scale and advance, the Euronext deal, on the four counts that we gave, to the last three, was ahead on every score.
51. But if they had kept the technology, would you not have had a platform to go under that organisation?
(Sir Brian Williamson) We could do that anyway because it is as open to the Stock Exchange as it is to a group of people who have asked us to design the technology for their own equity trading. We do that, yes.
52. Just briefly going back to the consequences of the merger, there are now two big key players in the European market: yourselves and Eurex. How do you see the competition developing? Are you likely to be rival outfits offering the same things or are you going to become niche operators and complement each other?
(Sir Brian Williamson) I think we both have a view on this. Jean-Fran"ois, you have been closer to it than I have. The advantage of doing this is that we at LIFFE have a main interest in interest-rate products and some equities. Euronext bring almost the opposite of that and that puts us in a very strong position. As for where we are then against Eurex, I would like to say that I think our technology is better, our distribution around the world is better and so our products potentially are broader than those of Eurex.
(Mr Möller) We are more the equity derivatives market than Eurex is. Eurex is speculative very much in the Bund. Secondly, I think if you look at Euronext itself, it is basically now a pan-European exchange covering several European countries. That puts us in a very good position to develop the equity option market further for the UK, the Netherlands, France, Belgium, Portugal and also for equity products basically for securities outside Euronext-land. That in itself I think is potentially a growth path for us, and we will be in a much better position than Eurex in that. I think that is also where a lot of the future growth will come.
53. That is how you see it now. Eurex is bigger at the moment than yourselves and presumably they are capable of adapting their products as well. They are reading the same signals as you are. So that is why I want to know which way this competition between just two key players is going to move, whether you are going to corner a bit each or whether you are going to offer exactly rival products right across the range.
(Mr Théodore) Both might be solutions. We will examine both and probably have a mix of both. There will be very strong and tough competition but we think we are a key player, especially with LIFFE and LIFFE CONNECT. We might go forward with the same type of products and fight for the liquidity on these products or we might be more creative and have new products. We are thinking about a series of new products. Single stock futures are of course already quoted but we have new projects and we will speak about them in due time. Creative products placed on our platform will allow us to win a market share against Eurex. Certainly we have a project on the side. That is the good thing about competition but we hope to be better.
54. As far as you can see into the future, you think it is likely to remain the case in the European market that there are two big players and you do not expect that to change, as far as you can see: is that right?
(Mr Théodore) For the reason Sir Brian was quoting, I tend to believe that it would not be an easy task for a third European player to come in. The American exchanges, for the time being, from what we know, have sufficient on their plate in their own market. Brian is more knowledgeable than I am on that.
55. You feel confident that two key players effectively governing the market provides genuine competition, do you?
(Mr Théodore) It will be fierce competition.
56. I know you are going to write us a note on this but with this single stock future competition that you are going to try and generate, it does seem crucial that the right conditions are in place to enable you to expand that market. That is clearly where you are. You may be able to do that in the European markets because the regulatory framework would permit it; you say it will not in the United States. We as a committee have an interest, provided we think the regulatory framework will be adequate, in providing support and encouragement to the authorities to enable you to compete in those markets. This is more of a statement than a question. We need as much as possible in the way of guidance from you on what is required.
(Sir Brian Williamson) Mr Tyrie, as I said, I think the Committee has been generous and helpful. Perhaps we have been slightly negligent in thinking you might not be able to help us there. That note is important. We are grateful to you. Thank you.
57. Sir Brian, do you think we will see exchange consolidation as well on a large scale?
(Sir Brian Williamson) You mean for all exchanges? Yes, I do. I think, Mr Chairman, I read something you were quoted as saying in the press, no doubt accurately, we hope, talking about the speed of consolidation in exchanges. As I said, I think the thrill from my point of view is that derivatives exchanges are consolidating very quickly. Will that have a knock-on effect on stock exchanges, which have been quite slow for a variety of reasons? I think the answer is "yes", and for two reasons. First of all, they will see that technology actually gets you there faster, and so that is one area. The competition and cost of technology I think means it is very difficult for a single exchange to sustain that sort of expenditure. That is really quite a compelling case for putting underlying exchanges together. I think the other one is this issue of futures on single stocks, because if the underlying stock exchanges do not move fast enough to consolidate, there is now an alternative to effectively trading pan-European and across American stocks within the European environment all on one platform, all under one regulatory system, something that has been devoutly to be desired amongst underlying stock exchanges. So they face, I think, two threats. I think that will produce just the sort of consolidation we are talking about. Is that going to be easily done? Well, it is more easily done now the companies tend to be publicly quoted. That I think is a rather elliptical answer to your earlier question about the change in governance. I think that makes a huge difference because the owners then are demanding the sort of reforms that the users want rather than being obstructed by members who may at times be holding on to old-fashioned franchises, as they see it.
58. The implication of the last part of your answer is that you expect this consolidation to take the form of mergers.
(Sir Brian Williamson) Or takeovers.
59. Or takeovers, and that is because the governance structures now allow that.
(Sir Brian Williamson) On the whole, yes.