ASX’s $553 million capital raising has raised some eyebrows and ignited some speculation but perhaps it just betrays Elmer Funke Kupper’s conservatism.
The reason the market was taken aback and slightly bemused by the announcement was that it didn’t see it coming. ASX hadn’t indicated any need for new capital and, with minimal debt (it has one $250 million unsecured and non-recourse facility) didn’t appear to need any.
ASX gave three reasons for the decision to ask shareholders for capital via a 2-for-19 pro rata renounceable entitlements issue that will include provision for retail entitlements trading.
The first was that it would enable ASX to contribute $200 million of extra equity to ASX Clear (Futures), which is the clearing facility and central counterparty for all of its futures, options on futures and ASX-listed contracts for difference trading.
The second was to replace the existing $250 million facility (which is debt raised within ASX Clearing Corporation) with equity and the third is to fund ASX growth initiatives with the net $89 million remaining.
The most important reason for raising the capital is to boost the capital supporting ASX Clear (Futures) in anticipation of new European capital requirements for central counterparties.
At the moment ASX’s clearing houses are required by the Reserve Bank to have the resources to be able to withstand the default of the clearing participant to which it has the biggest credit exposure. The European authorities, however, are moving towards requiring central counterparties to have the resources to withstand the default of the two participants to which it has the biggest exposures.
While the US hasn’t flagged a similar requirement it is also tightening the rules for clearing and generally regulators, post-crisis, are trying to lower the risks within the global trading and clearing of derivatives, indeed of most financial activity.
Given that much of the trading in futures is undertaken by international and global banks and investment banks, the European move towards increased capital requirements is of direct concern for ASX.
About a third of its revenue – its largest source of revenue – is generated from derivatives and the prospect that European banks and investment banks could be precluded from dealing with it would be very disconcerting. By raising the capital ASX will have contributed $700 million to its two clearing houses, including $450 million in ASX Clear (Futures).
While there is an element of pre-emption to the raising – ASX didn’t actually need to pump more capital into the clearing houses today – the decision to raise the capital while it can is a sensibly conservative move that perhaps betrays some anxiety about conditions in the future.
There is some nervousness – evidenced by the volatility in financial markets in recent weeks and the nine per cent fall in the Australian sharemarket – about the impact on markets of the eventual ‘’tapering’’ and ultimately the end of the US Federal Reserve Board’s quantitative easing programs. Better to shore up the clearing houses today than try to do it under pressure and at a greater cost in future.
If the $200 million of capital raised explicitly for that purpose is explicable in terms of conservatism, what of the ‘’other’’ $350 million or so?
It’s that larger amount, which includes the $250 million earmarked to wipe out ASX’s debt and leave it in a net cash position that appears to have puzzled the market and ignited some conspiracy theories. The debt doesn’t need to be refinanced or repaid until August 2015, so there is no pressure or urgency to dealing with it.
ASX takes the view that there is quite a lot happening in the clearing space – it is developing a new platform to provide central counterparty clearing for over-the-counter derivatives and that it needs to invest in its clearing houses and capitalise them robustly to protect them against the risk that activity will be shifted to larger and more familiar jurisdictions by the head offices of the big banks and investment banks that dominate trading of derivatives.
It wouldn’t need to repay the facility to do that but Funke Kupper, as a former senior banker, would be very aware that as the Basel III capital and liquidity requirements for banks phase in over the rest of this decade it is going to become harder and more expensive than it has been for corporates to get access to bank funding – the banks will lend less and charge more to cover the extra regulatory imposts.
Given that he was raising capital anyway, it was easier to do it once than be faced with the prospect that he might have to come back to the market in less favourable conditions late in 2014 or early in 2015.
The more cynical might see the size of the capital raising and its legacy of a balance sheet with net cash as a preparatory move for a major acquisition.