It didn’t exactly take Nostrodamus to predict a bid for NEX Group from an exchange operator – even I was all over this in this column in November 2015 when the Tullett-Icap deal was announced, and frankly any opportunity since has been taken to reinforce the logic. It’s simply an inevitable deal and was the day Icap shed its voice broking business.
Regular readers will also know I have never thought it will be an easy deal for CME to complete, mainly because ICE will also have an interest – there are fewer and fewer credible platforms available for purchase, so time is running out for anyone trying to get into the OTC FX space. The push for clearing and the hint that we may be getting somewhere on developing a credible CLOB for FX swaps makes it a doubly sweet deal for an exchange/clearinghouse operator.
If I am right and there will be competition for NEX that’s obviously good news for shareholders of the firm as it will push the price up. Press speculation has the price in the region of $2.5 billion, in another column on the subject I have suggested it will be closer to $3 billion, either way it’s a pricy deal.
So is it good value? I would have to say yes. Proving that I have been fairly obsessed by the subject I have also previously pointed out that the Traiana and Trioptima businesses could have some interesting synergies and opportunities – but the real deal is about the trading platforms.
In fixed income the business is growing, albeit mostly in US and European repos. Compared to January 2016, the first month of this year has US Treasury daily volumes down around $17 billion, but US repos up $50 billion and European repos up $70 billion.
In FX terms, the business looks at the top level, pretty stagnant, with volumes unchanged from January 2016 to January 2018, however that is not the true picture for NEX has a lot more strings to its bow that it once had. As I understand the matter, the forwards business is not booming but it is growing, and the aforementioned numbers are spot only.
I am not the only one who believes that the platform most likely to win the big game will be the one that nails the FX swaps market and NEX is in a position to be able to do that. It won’t be dominant, Thomson Reuters has good market share here, but it can be a significant player and that should be incentive enough for an exchange/clearing group.
Talking to people with a good knowledge of the workings at NEX, I have regularly been told that Michael Spencer, chairman of NEX, doesn’t want to sell the business and doesn’t have to. I understand that, but then my sources tell me he didn’t really want to sell the voice broking business either, but his hand was forced by fellow board members. The fact is, if the numbers stack up well enough, a deal will be forced through.
For CME the deal can help provide a boost – somewhere down the line – to its soon-to-be-launched CME FX Link business, and of course, as noted, we have the opportunities for clearing. It is also a revenue positive business, so with a few synergies here and there, CME can boost its bottom line fairly quickly (albeit with a $3 billion hole in its bank account!)
A combined CME (or ICE) and NEX would also have some serious financial clout and an excellent footprint across the globe, which could be interesting for those rival groups that have already done their deals. No matter how good the technology is, history in FX markets tells us that size means power, it’s a derivative of volume begets volume, and therefore one has to think that the two groups would be better together than apart and that they could make life tougher for their rivals.
So not a lot of surprise from this quarter, nor many others in truth, for this was, as I have noted, inevitable. So how about we speculate (very loosely!) on the next deal?
I have noted how ICE and CME both would like to get a foot firmly in the door of the OTC markets, so what does the “loser” do? What is left on the table?
I have also previously discussed, in August 2015 in this column, rumours State Street had been asked to decide whether Currenex was really a “core” business by the US authorities. At the time I suggested the rumour was wrong and that the deal likely to go through was the bank divesting itself of WM. That indeed did happen, but rumours of State Street trying to rid itself of Currenex have refused to go away.
So it could be that the bank’s willingness to sell will be tested by the firm that doesn’t get NEX. At first glance there are reasons to question the value from such a deal, but Currenex has a sizeable client franchise and executes good volumes across products, therefore the same benefits (minus the fixed income and post trade services) are available.
I am also wondering about another potential deal for the firm that misses out on NEX and it is, I admit, pretty left field. I am wondering how much the group led by Blackstone actually wants the trading businesses of Thomson Reuters? Is it actually the fact that they are more interested in the risk, analytics and data arms?
If it is, then an exchange group could find a willing seller for the trading businesses there. Certainly looking at the FX business the fact that Thomson Reuters handles currently over $400 billion per day in non-spot products has to make it attractive to a potential suitor.
So without getting too excited, this latest hint at a deal in the platform space could easily be a trigger for a second deal. Again, I don’t think this is unique thinking but it does suggest we could be looking at a radically different landscape in a year’s time. In fact, I think that was suggested in the Profit & Loss Crystal Ball feature this year, so whilst struggling to come to terms with being right so soon after making a prediction I think I’ll go and have a lay down in a dark room.