Lifetime achievement award: Lance Uggla

Lance Uggla, chief executive of Markit, pauses a moment and opens a door: “You should see this,” he says.

It’s impossible to know what lies behind that door, but the financial information services company Uggla founded with four former colleagues in 2001 now has more than 2,000 staff and provides its customers with around 1.8 million price updates per minute – so an educated guess might be some kind of IT nerve centre, a thousand screens glowing with data.

In fact, the door opens to reveal two men playing table tennis. One is in the act of executing a neat backhand backspin. “We’re having a tournament,” Uggla says.

It seems a bit out of place for a moment – but only for a moment. The next stop on the tour of the company’s London headquarters is a communal area featuring US diner-style booths and a tiered auditorium where employees – many of them Markit shareholders – can mingle and attend lunchtime debates. Elsewhere in the building is a yoga room. To complete the impersonation of a turn-of-the-millennium dotcom venture, Uggla later notes Markit has 400 web developers based in Boulder, Colorado.

“Within Markit, I don’t feel like we’re limited. I feel the world’s our oyster – we’ve got a lot to do and we’re having fun doing it,” he says.

Telling the biggest and best that they are equal to a regional player is quite an interesting challenge - it was the hardest part of setting Markit up

But Markit is a serious company. From humble beginnings – it originally operated from a barn in St Albans, Hertfordshire – it has grown rapidly, adding new business lines to its original credit default swap (CDS) data service, to the point where Uggla can say that a recent independent valuation of the company estimates its worth at somewhere between $4 billion and $5 billion. Private equity firm General Atlantic reportedly spent $250 million on a 7.5% stake in Markit in January 2010, valuing the company then at roughly $3.3 billion.

And Markit could have dramatically increased in both size and scope this year, if talks to acquire UK-based clearing house LCH.Clearnet had gone ahead. The company bowed out of the race in September, leaving the London Stock Exchange Group (LSE) as the sole remaining bidder. How keen was Markit on the deal?

“Very. I spent a lot of time personally working with their chief executive, Ian Axe, and felt we had developed a very strong relationship with him – we really liked him, thought he was great – and with the chairman, Jacques Aigrain. But the fact was that we valued the transaction some distance from where the LSE did,” says Uggla.

It’s not hard to see the attraction of the deal. Since its launch, Markit has expanded its data service – adding bonds, loans and equities to its original CDS offering – and has expanded into business lines such as trade processing, valuation and risk management. A clearing arm would have created a company with a broad range of related services: a horizontal, in the language of corporate strategy, in contrast to vertical businesses that tie customers to a single provider’s suite of services.

“We do pricing, valuation, processing and risk management of over-the-counter derivatives. Adding clearing just thickens out that horizontal band. I really felt the regulators and market participants wanted a horizontal player – and that verticalisation into a single entity was not good for the development of the market. I was confident we could add significant value,” says Uggla.

Tensions between these two visions of the world became startlingly public in February last year, when Deutsche Börse started lobbying against a change to Europe’s incoming rules on OTC clearing that would have expanded their remit to encompass all derivatives and, as a consequence, force vertical exchange-plus-clearing businesses – like the German firm – to open up to all-comers (Risk April 2011, pages 18–22). That fight was decided in the German exchange’s favour, and Uggla argues the proposed combination of Markit and LCH.Clearnet was the last chance to build a horizontal clearing structure that encompasses OTC derivatives.

“I don’t think there’s an opportunity to do that any more – that was it and I don’t see us going into clearing in any fashion now, although we offer great services that support or help others in that space,” he says.

Big ideas, brave decisions – and the ups and downs that accompany them – are a feature of Markit’s history. It started with Uggla’s recognition in 2000 that the fast-growing CDS market needed a reliable source of pricing information. At the time, he was head of global credit trading at TD Securities, based in London.

“We had a roughly $20 billion tradable portfolio that the bank required us to mark-to-market every night, but this being a purely OTC business, the only source of prices was those participants actively trading credit, both bonds and CDSs. So the counterparties we dealt with sent us their pricing information and we created algorithms to combine the data, clean it, and create a mark for ourselves. What I realised was that if we were having trouble marking our positions, many institutions around the world would be in the same position. The advent of a liquid credit derivative market would transform this asset class and assist in the mark-to-market of less liquid credit instruments,” he says.

Uggla also realised a source of CDS prices could be a money-spinner, and told his boss – Donald Wright, the chief executive of TD Securities – that he wanted to leave the bank to pursue the project. Wright liked Uggla’s idea so much that TD Securities became the fledgling company’s first financial backer. “That was quite a nice start – to have a big, AA-rated bank as my partner, setting out together,” Uggla says.

But things were about to get much more difficult. The original plan was to launch Markit as a dotcom – a fact Uggla says is not widely known – but no sooner had Uggla agreed terms to leave TD Securities in 2001 than the bubble burst.

“Here I was, sitting in a barn in St Albans, with this new company, and the dotcom world had vanished. So we told a branding consultant that what we wanted to do was exchange pricing information in the credit markets across the internet and – through that co-operation – monetise the contributors’ data in a fair and equitable fashion, and make it available to everyone on equal terms. And they said: ‘That sounds like a partnership – what about calling yourselves Markit Partners?’ So we decided we were going to be a real company with revenues and expenses, and we were going to do it the proper way. We rebranded ourselves Markit Partners. And that was the start,” he says.

It set the scene for Uggla’s greatest challenge – and his most conspicuous single achievement. Because market-makers were the only source of CDS price data, Markit invited those firms to become shareholders – but Uggla was convinced the only way to make the business a success was to treat its data providers equally, meaning any firm that put prices in would get the composite price back, and all contributors would see the same data. In essence, that meant a second-tier player providing prices on its local underlyings would get as much value from participating as a global dealer that was quoting prices across the full extent of the market. It took two full years to win everyone round.

“If a South African bank, a US bank and a European bank all provide a price, then it goes into the composite and everyone gets a share of the result. But telling the biggest and best they are equal to a regional player is quite an interesting challenge – it was the hardest part of setting Markit up,” Uggla says.

At that time, the biggest and best in the CDS market was arguably JP Morgan. The bank played a leading role in originating the product in the mid-1990s and then invested heavily in turning it into a market, so it felt some sense of ownership and responsibility, says Markit board member Tim Frost. As head of the credit business at JP Morgan, Frost orchestrated the bank’s investment in Markit and was one of its founding board members. When he left the bank in 2004, to help set up hedge fund Cairn Capital, he continued to serve on the board.

“Our attitude at the time was that JP Morgan had invested considerable resources in building the market infrastructure. We wanted to make that infrastructure available to all-comers – the more the merrier – but felt we should at least recoup our investment. There was obviously a recognition internally that there would be no market at all if we didn’t welcome our competitors, but we were certainly conscious of the years of apostolic work we’d put in with customers and regulators and felt it was appropriate for us to have a larger stake in this venture. Other pioneers such as Deutsche Bank and Goldman Sachs had similar views – and this is what Lance had to deal with,” he says.

Peter Nielsen, global head of markets in the global banking and markets division of Royal Bank of Scotland (RBS) – and a Markit board member – remembers it the same way. “That was not one of our original concerns, but a number of participants did feel that way and it was a strategic hurdle. He had to convince a number of the shareholders that their particular market perspective was not going to be disadvantaged – but Lance is, if nothing else, one of the more convincing individuals around when he has a point of view,” he says.

Uggla’s credibility as the leader of a big trading business, his conviction – and his character – were vital in winning support, says Cairn’s Frost. “He has all the attributes you’d associate with a dominant trading head, but he’s also a friendly, gregarious, open person who can listen, negotiate and find consensus among a group of people – that is a remarkable mixture. It’s very rare to find,” he says.

Nine dealers bought into the company and it launched its CDS pricing service in 2003. At the time, there was $2.7 trillion notional in CDSs outstanding, according to the International Swaps and Derivatives Association. By the end of 2004, the market had more than tripled to $8.4 trillion. It doubled in size in the 12 months that followed – and again by the end of 2006. In terms of outstanding notional, the market hit its peak in 2007 at $62.2 trillion, encompassing single-name and index products, with the indexes – owned by Markit – allowing market participants to hedge broad corporate and sovereign risks, as well as asset-backed securities (ABSs).

Without a pricing resource, what would have happened to the CDS market? “It wouldn’t exist,” says RBS’s Nielsen. “Without Markit, you wouldn’t have had the development and externalisation of independent pricing on CDSs, and particularly ABS indexes.”

But the rampant growth of the credit derivatives market ended when the crisis broke in 2007, and Markit found itself catapulted to wider public attention – and some notoriety – as a result of those ABS indexes, specifically the ABX.HE, which was based on 20 CDSs referencing subprime mortgage-backed securities (MBSs). As banks began announcing mammoth losses relating to their subprime MBSs, the level of the ABX gave the press an easy-to-grasp measure of the value of those assets – it became a proxy for the health of the entire banking system, and its creator, Markit, was caught in the cross-fire.

“It was the first time we’d seen negative press,” says Uggla. “ABX was a tool we created to help people hedge, but it was used so widely as a measure of financial health that inevitably some people pointed to it as one of the causes of the crisis. Some people will tell you that all publicity is good publicity, but I can tell you I didn’t feel great that our company was being referenced against this index that people viewed as evil.”

Uggla says the CDS data business now represents less than 10% of the company’s revenues – no bad thing in a world where CDS volumes have declined sharply and powerful critics would like to see the market shut down entirely. The rest of the company’s revenue now comes from fields such as indexes, valuation, risk management and processing services across asset classes.

Markit’s leap into the latter business came in 2007, when it acquired SwapsWire, a dealer-backed provider of confirmation and connectivity services for electronically traded OTC derivatives – middleware, for short. The business, ultimately combined in a joint venture with the Depository Trust & Clearing Corporation’s Deriv/Serv to become MarkitServ, now accounts for 20% of Markit’s total revenue, says Uggla. On the face of it, this ought to be one of the company’s gems, as regulation on both sides of the Atlantic pushes the derivatives markets towards mandatory clearing and electronic execution – introducing more participants and new layers to the OTC market. But what regulation gives with one hand, it takes away with the other (Risk December 2011, pages 54–56).

“Historically, that business was all about confirmations, but as trading moves to clearing houses and trading platforms, confirms might not be needed if trades are executed and cleared immediately. That won’t happen for every single derivatives instrument, so uncleared trades will still need confirms. I think the edge we have is that we connect several thousand market participants – we are the plumbing that connects the OTC markets, and connectivity is key if competition is to thrive. Also, the new reporting requirements will be a major headache for the industry and this is a problem we will be able to solve,” he says.

Uggla is also bullish about the prospect of providing initial margin calculation services for uncleared trades. In April, US regulators proposed that trades remaining outside the clearing system be subject to mandatory bilateral posting of initial and variation margin – a hugely controversial rule that other jurisdictions have yet to copy (Risk September 2011, pages 16–20). But Uggla expects them to follow the US eventually, creating a new opportunity for the company.

“Ultimately, I don’t think you can have very distinct, separate regimes, or it will be open to arbitrage, so I expect Europe and the US to come closer on this as the debate continues. Which means everyone will need an initial margin calculator for uncleared trades – well, why not just build it once? We’d be great at that,” he says.

And Uggla isn’t finished with bigger ideas, either – at one point, when asked about the middleware service offered by Bloomberg free of charge to users of the company’s terminals, he counters: “They have $6 billion of terminal revenues, and the service is free? That’s an interesting use of the word. But I’d like to create something free – and maybe we have a chance to do that with the internet,” he says.

The idea is that a company like Markit could replicate the network Bloomberg creates with its terminals, but provide that network via the internet, making it accessible and free. All Markit would need to do is find a way to attract users to the network, then find a way to make it pay – almost certainly not as easy as it sounds, but Uggla is undaunted.

“Today, Markit is purely a content and services company, we produce content, we provide financial information and services, but we don’t have an installed terminal base as a network,” he says. “The best network we could compete on is the internet, because that is available on everybody’s desktop. So, we have great content and great customers – the only question is whether we are brave enough to do free properly.”

So, is he? “Definitely,” Uggla says.

The only fly in Markit’s ointment is an antitrust probe the company faces, on both sides of the Atlantic. The European Commission launched its investigation in April last year, and is looking at whether Markit’s licensing and distribution agreements could be hampering competition in the CDS data business. The US Department of Justice launched an investigation in 2009.

“I think that working with regulators is part of growing up as a company. But these challenges don’t keep me awake at night – I know we’re a good company, with good people that are working to build better market infrastructure. So all we can do is participate and co-operate,” he says.

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