As the City prepares for Brexit, the authorities should call a halt on the LSE merger with Deutsche Börse

As the City prepares for Brexit, the authorities should call a halt on the LSE merger with Deutsche Börse

The London Stock Exchange has long been a City icon. In an era when so few British financial institutions have global status, it ranks besides Lloyd’s and the London Clearing House (of which it owns 57%) as a proud symbol of the City’s leadership of world financial markets. Indeed its Big Bang in the 1980s, alongside the earlier development of the Eurodollar market, cemented London’s world status.

And yet now, at one of the most crucial moments in the City’s history as it prepares for Brexit, it seems, by its merger with the Deutsche Börse, to be moving inexorably to a lame duck status within an organisation of which its shareholders will have a minority, not with a Bang but a whimper, it might be said.

There can be no doubt that the LSE continues to offer a wide, well-managed, and diverse range of listings and other exchange services. It is hard to see what technically or operationally, apart from financial synergies, it can gain from such a merger. Can the project realise some strategy not otherwise achievable?

Certainly the LSE has not always displayed strategic vision. Its failure to merge with the London International Financial Futures and Options Exchange (LIFFE) ranks alongside the LIBOR scandal and the conflation of commercial and investment banking as one of the greatest setbacks for the City and world markets in the 21st century.

Perhaps it is another example of the impact of Wimbledonisation on the City: we provide the courts and overseas players come and play in them. The views and interests of multinational organisations have tended to be mistakenly perceived as synonymous with those of the City as a whole, particularly in the context of Brexit, and certainly such institutions have no vested interest in the continuing independence of the Stock Exchange.

But Britain does. Neither the City nor the LSE itself need this merger. Business history is riddled with mergers and takeovers in which the dominant player makes pledges at the outset to reassure the minority – pledges which are quickly dumped in the longer term interest of the merged organisation. Whatever the current commitment to London headquarters, it is disingenuous to believe that in a post-Brexit environment the centre of gravity of the LSE/DB will not drift back to Frankfurt.

And London would lose control of another iconic institution, its subsidiary, the London Clearing House. LCH’s trillion dollar multicurrency, multiproduct, massively diverse counterparty operation stands at the epicentre of European, indeed global systemic risk management. No doubt the European Central Bank will pursue its current policy of repatriating euroclearing to the Eurozone and it is hard to see how an institution the majority of whose shareholders are located on the continent would not use whatever means available to it to support this process.

Reinforcing this concern, a major justification for the merger is the concept of the vast collateral pool that would result from the merged clearing operations. Since the cross margining, that is to say offset of assets held in security, can only be effective if those assets are held by the same legal entity, it is clear that the necessary vehicle can only be a combined clearing house, located to the shareholders’ satisfaction.

Despite the agreement of shareholders, the merger can be halted by British authorities. In its former incarnation as the SIB, the FCA had written into its charter the promotion of greater competition in financial markets; this approach should still permeate its strategic actions. Likewise the Bank of England will have its own view of what is best for Britain, and the Government too can intervene. All is yet to play for.

(Photocredit: carmen_seaby)