It’s clear to me who will have the upper hand if the deal does go ahead even if the fact that the merged entity will be listed in London, headquartered in Amsterdam and regulated by the Dutch central bank ostensibly makes it look even-Stevens.
However, a joke doing the rounds in the market perfectly sums up the true situation. “You know how it’s become a custom in mergers for each bank to keep part of its name,” it goes. “Well Barclays will keep Barclays, and ABN Amro is to keep Bank,” it concludes.
From an FX perspective, what will the new business look like? Last year, Barclays had a 6.61% share of the market, according to the Euromoney poll. ABN’s share was 2.93%. Even if Barclays were to retain all of ABN’s share, which is extremely unlikely, it would not move further up the rankings, based purely on the 2006 results. Using a football (or soccer for the benefit of my US readers) analogy, Barclays is a little bit like Chelsea or Manchester United. The bank has got its chequebook out and spent heavily to build a winning team. Its e-commerce platform is considered one of the best and it has really invested in its staff. ABN Amro might have strengths in places Barclays doesn’t but these look geographical. So the new business is likely to look pretty much like what Barclays has now with a slightly wider reach.
Ice, Ice Baby
This week it seems as if mergers are like London buses. You wait ages for one to come along, and then at least two appear at the same time.
The world of exchange-traded derivatives might not feature too highly in the mindsets of many FX participants but many traders make full use of various exchanges’ products. Most forward traders utilize short-term interest rate contracts to manage their books. Even for spot traders, the CME is increasingly becoming a liquidity source that can’t be ignored.
That said, the CME’s announcement last year that it was going to take over its near-neighbour, the Chicago Board of Trade (Euromoney, October 2006) won’t have caused too much excitement in the FX market. The view is that whatever happens won’t affect the contracts market that participants use.
A CME/CBOT tie-up has been talked about for years. Previously there were simply far too many obstacles – such as ego – in its way to make it a reality. Last year, it seemed these had been overcome and the exchanges were poised to create a true derivatives powerhouse. The only doubt was whether or not the takeover would create an effective monopoly in much of US futures trading.
Then, last week, electronic upstart the IntercontinentalExchange rudely gate-crashed the party. I can’t help but think there’s a certain irony in ICE’s move. The Chicago exchanges were extremely slow to embrace electronic trading but they were largely immune to the competitive threat posed by the far-more advanced European exchanges, which had pioneered electronic trading and a for-profit structure, because of overt protectionism in the US. This provided both the CME and particularly the CBOT with the time to modernize slowly. The European exchanges had no chance ever of providing them with real competition in the US, let alone taking them over.
The Atlanta-based ICE has become the cuckoo in the nest. Its emergence is another example of how a modern, forward-thinking company can challenge the established order. ICE, which started out as a platform for OTC energy trading, was able to build itself up into a significant player so quickly because of its savvy initial investors and because it had a technological advantage – electronic trading. The stupidity of many of its rivals has also helped.
Incredibly, ICE only expanded into futures in 2001 when it purchased the IPE in a very clever deal reported at the time as being worth around $135 million. It floated on the New York Stock Exchange in November 2005. ICE’s announcement last week at a futures industry jolly in Boca Raton that it was prepared to offer a tad under $10 billion for the CBOT shows just how far the exchange has come in a very short space of time.
ICE also owns the New York Board of Trade, which it bought in December. It announced earlier this month that it was in the process of migrating NYBOT’s FX contracts, including the dollar index, on to its screens. These may be niche products, but it is arguable that having to trade them in a pit has hampered their take-up. Putting them on screens might make them attractive to many more users, including hedge funds and arbitrageurs.
The exchange has another clear link to FX. It was sued a while back by EBS for breaching two of its pieces of intellectual copyright, known collectively as the Togher patent. This is a program that pre-screens potential counterparties for credit. In other words, it makes sure they can trade with each other. ICE settled for $15 million in September 2005, just before it floated. In return it was released from the legal claims without admitting liability. ICE is clearly in expansion mode. At the moment it has a small presence in FX. Once the dust settles on its proposed takeover, it will be interesting to see if it decides to increase this.
Ava hedge? Ava larf
Chris Hunt, Euromoney’s online publisher, who is more widely known as Chunt, got an enquiry this week from another retail trading platform, Ava FX, about how much an advert on the Weekly FiX would cost. As normal, Chunt asked me if I knew of the company. “Never heard of them, give me the link,” was my reply, as it always is.
I logged on and scooted around on the site, trying to find out who was behind it, where it was based and what it offered. The site has an extensive educational centre, which includes a definition of a hedge. “A hedge is a trade that is in the opposite direction of an existing trade or open position. This can be a partial or a full hedge and does not close the position although it has the same affect (sic).”
So that’s where I went wrong, all those years ago. I never knew how to hedge properly. I sent Ava FX’s definition to a few of the muckers. Various responses are listed below. A special mention to the select few who spotted the incorrect use of the word ‘affect’.
• “Winner of the ‘Mare of the month’ award?
• Affect not effect? I know derivatives can be complex. This definitely confused me. Perhaps instead of bribing with dinners and ski trips, banks would create a social benefit by sending out dictionaries to their liquidity resellers.
Someone who works in the retail sector, offered the following:
• You would be surprised how many people want to do that. So we get them to open a main account and a sub-account and they can be long on one and short on the other. You can tell them until you are blue in the face that they are square but they won’t believe you. Who was the chief dealer/cable trader at Chase London in the late 1980s? He used to do the same.
Other responses were more predictable.
• “Bloody idiots; everyone knows a hedge is a row of bushes or low trees planted closely to form a boundary between pieces of land or at the sides of a road.”
• “I thought they were designed to annoy your neighbours?”
You can’t make this stuff up.
Harry Hindsight
Finally for this week, I’d like to introduce you to Harry Hindsight. Every bank has at least one Harry, quite often in a senior role, who will come out at the end of the day and say something like: “I take it we were short today. It was obvious the dollar was going down.”
Harry’s first comment is on Merrill Lynch’s announcement that it has created the “ML FX Clone” model to replicate hedge fund FX strategies. “Given the performance of hedge funds last year, shouldn’t this be called the ‘ML FX Clown’ model,” asks Harry. Oh, how easy it is to deal backwards.
People moves: For premium Euromoney subscribers only!
This week:
Back to the Citi;
Ins and outs at ABN Amro;
Who's resurfacing at Crédit Agricole?
The Weekly FiX: What's going on in the world of FX this week? Get your FiX to find out.
Lee Oliver can be contacted at fx@euromoney.com.
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