A natural fit
The LSEG acquisition of Refinitiv has been grabbing the headlines, but the related acquisition of the Borsa Italiana Group by Euronext, will be an interesting deal in its own right, if it clears the final regulatory hurdles.
The Euronext press release on the deal identifies pre-tax run rate synergies in year 3 of €60m, of which €45m are cost savings and €15m is revenue increase through cross-selling opportunities and other business growth. The restructuring cost to realise those synergies is estimated at €100m.
The synergies in the deal are arguably even more compelling than with the larger LSEG Refinitiv tie-up, as the two businesses are so complementary. Borsa Italiana Group’s strength in fixed income and post-trade will provide revenue diversification to Euronext, much as it did to the London Stock Exchange Group in 2007 and adding a CCP to the group completes Euronext’s presence at all levels of the Financial Market Infrastructure (FMI) value chain.
A step forward for European capital markets
That’s good news for the combined group and the EU’s objective of Capital Markets Union (CMU). Creating a single point of entry for the combined liquidity pools and rationalising post-trade operations across the merged entities will decrease the fragmentation that is impeding the expansion of European capital markets. As acknowledged in the Final Report of the High-Level Forum on the Capital Markets Union (2020): “The EU post-trading landscape remains fragmented along national lines, thwarting potential cost savings, which may result from competitive pressure and scale effects”.
That fragmentation is attributable to political factors, and practical barriers. The observations of the second Giovannini Group report of 2003 remain largely relevant today: fiscal, legal and market practice divergences between member states are an impediment to the EU objective of CMU. EU policy interventions in the past 15 years have enabled progress: MiFID (I and II), EMIR, CSDR, T2S and the Settlement Finality Directive (SFD) have brought greater standardisation and transparency. The launch of ECMS by the ECB (planned for November 2023), will be another step forward, delivering similar benefits for collateral management. However, national interests remain a limiting factor. FMIs are often prized national assets and member states are reluctant to sacrifice them (or cede control over them) for the greater good of CMU.
The stressed market conditions arising in the Covid-19 pandemic have exposed some risks associated with FMI consolidation, with high profile system outages impacting multiple markets simultaneously. This should not be taken as an argument against the further consolidation of European capital markets, but rather as a reminder of the central importance of business resilience and the need to adequately invest in scalable technology, to ensure the stability of markets.
CSD consolidation is gathering pace, after a slow start
Despite these impediments, there are signs of increasing competition and consolidation between FMIs. In the CSD layer, Euroclear broke new ground in 2009 with its launch of ESES. This brought the Belgian, Dutch and French domestic CSDs onto a single platform, under a harmonised framework, but as separate legal entities. Euroclear proved that technology and operational synergies can be realised, while preserving the national identities of the CSDs, satisfying political considerations and continuing to service clients locally.
This established a blueprint, but no other CSDs followed Euroclear’s lead for almost a decade. Nasdaq was the next to move, starting with the consolidation of its Baltic CSDs into a single legal entity in 2017, followed by the integration of its Icelandic CSD in 2019. The Nasdaq model is the fullest integration seen to date; with the four national CSDs operating on shared technology, as a single legal entity under one CSDR licence. The benefits of cross-selling, run-rate savings through synergies and combined scale outweighed the less material political impediments to merging smaller markets.
With its acquisition of the Norwegian and Danish CSDs within the past two years, Euronext has strengthened its presence in the CSD layer and positioned itself in competition with Euroclear, the owner of the Swedish and Finnish CSDs. We’re seeing competing groups emerging. The post-trade landscape in Europe is evolving quickly and all CSDs must consider their strategic positioning within it. For individual domestic CSDs, there will be opportunities as well as threats. Joining forces with other individual domestic CSDs to create regional hubs, or combining with a larger CSD group, could provide a gateway to a broader client base and to unlocking the power of larger pools of data. Consolidation amongst the larger groups would be bolder, but could enhance Europe’s competitive positioning in the global marketplace.
How will the Euronext approach the integration of the Borsa Italiana Group?
As with all FMI mergers and acquisitions, politics will add a layer of complexity to the deal. The consolidation of the new group’s CSDs will most likely be undertaken in an “ESES-like” model, with the preservation of Monte Titoli’s national identity a paramount factor. As stated in the Euronext press release: “The Borsa Italiana Group will maintain its current functions, structure and relationships within the Italian ecosystem and preserve its Italian identity and strengths.” Effective consolidation of the technology and operations of its Danish, Portuguese and Norwegian CSDs, with the newly acquired Italian CSD (Monte Titoli) will make a significant contribution to the cost-saving synergies identified in the deal.
At the exchange layer, Euronext’s Optiq platform will become the single solution for the combined group, but the choice at CSD level is less obvious. Monte Titoli will be the scale CSD of the group, but it does not automatically follow that its technology platform will become the group solution. Euronext will carefully consider the complexities of each CSD’s operating model, the degree of interconnectedness with other markets and the cost and flexibility of the respective technologies, in defining its strategy.
It’s an exciting deal, with significant potential benefits for the combined group and more broadly for European capital markets. Establishing a clear vision and identity for the combined group, choosing the right technology and operating model and defining group governance, respecting cultural and political considerations will be key to success. Establishing an effective programme structure, selecting the most appropriate delivery model (be it agile, waterfall or hybrid) and recognising the central importance of change management in post-merger integrations, will be instrumental in realising the targeted synergies.
About The Author
Paul Thornhill is an experienced programme manager, specialising in the structuring and delivery of complex programmes within capital markets. He has 15 years of change experience, gained within tier 1 investment banks, major stock exchanges, CCPs and CSDs. Paul is a Senior Consultant for ::projective leading transformational programmes in London and continental Europe.
Projective Group is a pan-European transformation and consulting group focused exclusively on the Banking & Finance Markets. With offices in five countries and more than 300 consultants Projective has been creating value for leading financial services institutions, including FMIs for almost fifteen years.
Projective helps FMIs deliver challenging infrastructure change and enterprise re-platforming. They bring specialist capabilities to support pre and post-merger integration, including a mature PMI Framework and experience of building a new CSD.
Projective understands that FMI led change often impacts a broad range of market stakeholders. Projective has extensive experience of engaging with EU and UK regulators and establishing market-wide working groups, to ensure comprehensive stakeholder engagement.
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