LSE moves to offer new equity derivatives services

The London Stock Exchange (LSE) plans to buy OM London Exchange and will rename the company EDX London. The move is part of a bid by the LSE to improve efficiency and risk management in the equity derivatives business.

EDX London, in which the LSE will take a 76% stake, will pay Sweden’s OM £24 million for the transfer of its equity derivatives business and technology. OM, which aborted a hostile takeover for the LSE in 2000, will retain a 24% strategic interest in EDX London.

While EDX London will continue offering exchange and clearing services for Scandinavian equity derivatives, the LSE plans to extend services to include over-the-counter equity derivatives confirmation and clearing. It will co-ordinate this effort in conjunction with the London Clearing House (LCH), which offers similar services for fixed-income instruments. “A central counterparty would significantly help the market address credit risk,” said one trader. LCH officials were not immediately available to elaborate on the development.

LSE chief executive Clara Furse said in a statement: “We will be providing the growing equity derivatives markets in London with new products and services, which will reduce risk and cost." This could potentially place the LSE on a collision course with the London International Financial Futures and Options Exchange (Liffe), which it failed to prevent rival Euronext from purchasing late last year. But an LSE spokesman denied EDX London would seek to offer similar products to those already well established on Liffe – for example equity options.

Market participants largely favoured the deal, saying the use of OM’s highly regarded ‘click’ trading and the ‘secur’ clearing technology by EDX London should overcome issues of poor capacity and technological hitches currently plaguing the LSE.

It could also prove a shot in the arm for the country’s nascent covered warrant market. At present there is only room for 300 covered warrants on the LSE since they debuted at the end of October. In Italy, where covered warrants were launched in 1998, there are now more than 7,000 warrants listed. The LSE’s CWTS system was described by some traders as “pretty poor”, and no covered warrants transactions have been made online to date.

“They could build a very exciting platform for covered warrants that would match anything in the world,” said David Lake, head of the UK warrants business at French investment bank SG. “We issue warrants in Finland and Sweden and are aware of the sophistication [of OM’s technology].”

Marc Bailey, the LSE’s director of business development, will head the new company with about 30 OM staff transfering to EDX London.