David Schwimmer (pictured) may have spent most of the past three years focused on the $27bn (£19.4bn) acquisition of data and tech firm Refinitiv but the LSE Group chief executive has also been forced to track secular trends reshaping the markets in which the UK group operates.
The most disruptive of these are the industry-wide transition away from the tarnished Libor lending rate and Brexit.
The demise of the London Interbank Offered Rate can be traced back to 2012 when various investment banks were found to have to rigged Libor to suit their trading positions.
Roll forward to 2021 and regulators are pushing their reform programmes hard, with the Bank of England leading the way with its Libor alternative Sonia. The European and US regulators are working in parallel on their preferred alternatives ESTR and SOFR.
LSE Group, which trades derivatives based on Libor and Sonia, is affected by these initiatives in different ways yet Schwimmer sees the transition as a positive for his group.
We have benchmarks that are helping in the shift to alternative reference rates, which are receiving industry endorsement
The LSE Group chief said: “With regards to Libor, there are opportunities across the Group largely with regards to benchmarks, our data business as well as in post-trade.”
Schwimmer added: “We have benchmarks that are helping in the shift to alternative reference rates, which are receiving industry endorsement. And LCH is playing a critical role, working with the industry groups and regulators in making the shift to the new reference rates.”
LSE group-owned LCH is the world’s largest swaps clearing house, supporting the clearing of many swaps based on regional versions of Libor. LCH, then, has a big part to play in the transition away from the legacy rate.
Schwimmer said: “Last year, we made the transition to using the ESTR discounting rates in July and the shift to SOFR discounting rates for US dollar products in the Fall. That was a huge exercise in terms of helping shift the market over and LCH played an important role in working with the industry to help that go smoothly.”
He added: “LCH has products in a number of different currencies in the new reference rates to help facilitate the smooth shift. In the new rates and the swaps associated with them, LCH is playing a leading role in getting them introduced to the market, clearing them and helping our members and clients start using them much more actively.”
LCH has also been hitting the headlines in recent years because of Brexit.
As the main clearer of Euro-denominated swaps, LCH has become a target for European regulators and clearing houses, principally Frankfurt’s Eurex Clearing, that want Euro clearing in the European Union under the control of the European Central Bank and the European legal system.
Schwimmer said: “There is clear recognition that LCH provides systemically important clearing services to members round the world. The interest rate swaps market is global and it is important that EU-domiciled participants can continue to benefit from the risk management and netting efficiencies offered through these global pools of liquidity.”
Netting efficiencies are important. Where a large multi-national firm clears various swaps with a single clearing house, like LCH, the clearing firm can calculate and charge the client based on its net exposure across a range of correlated assets rather than the gross exposure on each line. This can mean savings of billions of dollars a year for large firms, crucial at a time that banks in particular are struggling with tough capital requirements.
The movement of trading in EU securities to Europe is a very visible example of a change that has been driven by Brexit
The LSE Group has been at the forefront of efforts to secure from the Europeans equivalence rights for London-based clearing houses, an issue which has yet to be resolved permanently.
Schwimmer continued: “LCH has again been granted temporary equivalence until June 2022 and continues to offer clearing for all products and services to all members and clients. We will continue to engage and cooperate with the relevant regulatory authorities in order to be in a position to achieve long-term permanent recognition of LCH Ltd under EMIR 2.2.”
Another recent effect of Brexit was the shift of European share trading from London to Europe, with Amsterdam being the key beneficiary. The Dutch city surpassed London in February as the main trading hub for EU-based shares.
Schwimmer said: “The movement of trading in EU securities to Europe is a very visible example of a change that has been driven by Brexit. It is tied to the Share Trading Obligation where most EU companies need to be traded on an EU recognised venue. It’s something that we had anticipated and planned for by setting up Turquoise Europe in Amsterdam.”
The LSE Group established Turquoise Europe, an Amsterdam-based version of its London-based market, in November 2020 to enable European clients to trade European stocks without the hassle of Brexit.
Looking ahead, Schwimmer said it is important that relations between Europe and the UK remain positive.
He said: “It is important for there to be a constructive relationship between the EU and UK. Less fragmentation and more co-operation and continuity of service are in everyone's interest."
Schwimmer continued: “London remains one of the world’s leading financial capitals and I have a lot of confidence in London and its positioning. Brexit has not been helpful but it doesn't change the fact that London has a winning combination, from culture and schools to the rule of law and a critical mass of skilled advisors."
With the Refinitiv deal complete, the LSE Group has a strong presence in fixed income with Tradeweb and foreign exchange with FXall but the group is still undeweight in listed derivatives trading when compared with peers such CME Group, Intercontinental Exchange and Deutsche Boerse.
Reflecting on this position, Schwimmer said: “We now have a very strong position across equities, fixed income and foreign exchange but we are not a big player in derivatives trading. We have an interesting initiative in CurveGlobal. It is growing well but we recognise that, on a global basis, it is a relatively small initiative.”
The LSE Group chief continued by asserting the UK group supports many derivatives businesses through FTSE Russell, which provides the indices on which these instruments are based, and LCH, the world’s largest derivatives clearing house.
“We have a very strong position in derivatives products traded on other exchanges based on FTSE Russell indices. We have a strong relationship with exchanges including SGX, Cboe and CME.”
Schwimmer concluded: “There are many parts of our business that facilitate derivatives trading and, of course, we clear derivatives in post-trade. If I had my druthers, would I like to have a bigger position in listed derivatives? Sure. But we have a great business today, we have a huge portfolio of terrific assets.”
In the first instalment of this three-part series, Schwimmer looked ahead to the challenge of merging LSE Group with Refinitiv. To read this article, click here.
In the second part of the series, Schwimmer reflected on the role that his Group can play in the transition to a sustainable economy. To read that article, click here.
This article was first published by SRP sister publication, Global Investor Group, on 17 March 2021.