Swan's delay puts exchange in play
be delayed ahead of the federal
election.
What the clearing decision does do, however, is put the ASX back in play if one of the big exchanges decides to add the local market operator to the global trend to consolidate.
Until now the ASX was considered virtually takeover proof after the government knocked back the Singapore Exchange's $8.4 billion takeover bid in April 2011 citing national interest concerns.
The concern was that a foreign takeover would adversely affect regulation of the ASX's monopoly clearing and settlement system, which underpins the financial system. Swan gave scant details of what would be required to overcome these concerns in a market that was trying to become a financial hub for Asia.
But the 30-page report released by the Council of Financial Regulators gives a mud map of what the regulators - and government - would require to satisfy any national security issues. It does this under the section "minimum conditions for safe and effective competition". This could easily be applied to a foreign predator.
Conditions include requiring regulatory influence over cross-border clearing and settlement systems and states that a competing central counterparty clearing (CCP) system based overseas would be required to incorporate locally. Other conditions include a notice period of at least one year ahead of any planned exit by a CCP. "This should be supported by ring-fenced capital sufficient to cover operating expenses for the notice period, calculated on a rolling basis, as well as clearly articulated wind-down plans which would be discussed with ASIC and the bank. Such requirements could potentially be imposed through licence conditions," the report states. It also outlines some conditions for the settlement system.
Consolidation of exchanges was put on hold during the GFC. But in the past 18 months it has returned with gusto as exchanges look for ways to keep up with their clients - including central banks, governments, hedge funds and pension funds - that demand cheaper and faster trading systems.
Changes in regulation and the rise of derivatives is adding to the charge.
Put simply, these factors, including globalisation, are presenting all exchanges with a stark future: link with a powerful foreign counterpart or slide into insignificance.
It explains why the commodities and energy Intercontinental Exchange lobbed a takeover bid for NYSE Euronext in December. Before that the London Stock Exchange announced it was interested in buying a 60 per cent stake in the world's biggest clearing house, LCH.Clearnet, and the Norwegian stock exchange merged with its Swedish counterpart, two Russian exchanges merged and London Metals Exchange was sold to Hong Kong Exchange and Clearing.
More recently, the Financial Times reported that Singapore Exchange was keen to buy a stake in LCH.Clearnet or join the London Stock Exchange in becoming a 60 per cent shareholder in LCH.
This is an interesting twist given LCH.Clearnet has been trying to break into the Australian market by setting up a competing clearing exchange.
LCH applied to the regulator ASIC more than 12 months ago for a licence, but was told on Monday that it had been unsuccessful as the Treasurer wanted to preserve the ASX's monopoly in this space.
Its application to bust open the ASX's clearing monopoly followed the entry of Chi-X, which was granted a licence to set up an alternative trading exchange in competition with the ASX.
Since then, the ASX has been forced to cut prices and invest in technology to try to keep as many customers as possible. Faced with the prospect of a further erosion of its revenue and market share on the clearing and settlement side, which accounts for 14 per cent of group revenue, it lobbied hard.
ASX boss Elmer Funke Kupper and its manager of corporate affairs Amanda Lampe ran an effective campaign against a second clearing system on the basis that "any change to the structure of clearing and settlement will increase operational risk".
They cleverly argued that additional costs to end users could be in the range of $20 million to $30 million due to reduced netting efficiencies and higher technology and regulatory costs, which is more than the potential savings of $15 million to $20 million that would come from price competition.
Once the government let the competition genie out of the bottle by allowing Chi-X to set up as a competitor, it needed to allow the ASX to merge or be taken over.
If the polls are right and a Coalition landslide is a certainty, it will pave the way for a number of options, including LCH returning for a second bite at a clearing licence, a foreign predator making an offer for the ASX or the ASX joining forces with another exchange to join what one day will undoubtedly be a global federation of exchanges.
In the meantime, there will undoubtedly be numerous other decisions that the government will throw into the too-hard basket.
Frequently Asked Questions about this Article…
Treasurer Wayne Swan announced a two-year deferral of any decision on Australia’s clearing and settlement system. The delay puts a range of related policy moves on hold ahead of the federal election and reopens the possibility of changes to how the ASX’s clearing monopoly is treated.
By deferring the clearing decision, the government effectively puts the ASX back 'in play' for potential consolidation or takeover discussions. Previously the ASX had been seen as almost takeover-proof after the government rejected Singapore Exchange’s bid, but the delay loosens that certainty for investors and buyers.
The 30-page Council report sets out 'minimum conditions for safe and effective competition', including regulatory influence over cross-border clearing, a requirement for overseas CCPs to incorporate locally, at least one year’s notice before any planned exit, ring‑fenced capital to cover operating expenses for the notice period, and clear wind‑down plans to be discussed with ASIC and the bank.
LCH.Clearnet applied to ASIC for a licence to set up a competing clearing exchange more than 12 months ago but was unsuccessful at the time because the Treasurer wanted to preserve the ASX’s monopoly in clearing and settlement. The article notes LCH could reapply in future depending on policy changes.
Chi‑X was granted a licence to operate as an alternative trading exchange, which forced the ASX to cut prices and invest in technology to retain customers. For everyday investors this has meant increased competition between trading venues, which can lead to lower trading costs and improved trading systems over time.
Exchanges are consolidating to offer cheaper, faster trading and to handle increased derivatives and regulatory change — clients like central banks, hedge funds and pension funds demand it. For investors, consolidation can mean access to better technology and deeper markets but also changes to fees, counterparty arrangements and where clearing occurs.
The ASX argued that introducing a second clearing system would increase operational risk and could raise end‑user costs by an estimated $20–30 million due to reduced netting efficiencies and higher technology and regulatory costs — more than the projected $15–20 million savings from price competition, according to its campaign.
Yes. The article says a Coalition landslide could open the door to options such as LCH reapplying for a clearing licence, a foreign buyer making an offer for the ASX, or the ASX merging with another exchange. Any such outcome would reshape the structure of clearing, settlement and potentially fees for market participants.
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