Creditflux Newsletter

So, goodbye 2011. For Wolseley, most memories of 2011 are so painful we think it best to look forward to 2012 rather than dwell on them.

But this year, rather than looking into his own crystal ball (which didn’t seem to work last year), Wolseley wants to try and guess what Xavier Rolet, chief executive of the London Stock Exchange, has seen when staring into his.

Rolet certainly seems to have a clear vision of the future. Since the failure of its bid for the Toronto Stock Exchange in the summer, the LSE has had its bid for the London Clearing House LCHClearnet recommended by the board. This same LCH has announced that it has hired credit market stalwart Charlie Longden, formerly of ABN Amro and Markit, to run its CDSClear subsidiary. And, almost simultaneously, LSE announced an agreement to pay £450m to buy the 50% of index provider FTSE that it doesn’t already own.

LSE talks about the importance of diversifying its earnings to explain the consolidation of FTSE, but Wolseley thinks it is soft pedalling this burst of activity. As an exchange with a clearing house, deep credit expertise courtesy of Longden and others already on board, plus in-house index capability, LSE has a strong hand for making an impact on our market in 2012.

None of us know exactly what regulation will bring, but we all feel the pressure to move over-the-counter markets on to exchanges, or at least towards clearers.

From nowhere six months ago (when it had cleared less than €100 billion of CDS contracts, mainly between French banks), the LSE’s new clearer is now well placed to become the platform of choice for the credit derivative business.

What is more, with ownership of a strong index brand and the analytical capability that comes with it, LSE is in a good position to identify demand for new contracts, then to design, brand and launch them, and finally to package, market and distribute the price information that comes with them.

Rolet, it would seem, sees a credit market where most trading takes place on electronic platforms like Tradeweb, AllQ or Sunil Hirani’s much anticipated TrueSEF. In some of these trading venues the historic differences between the buy-side and sell-side will diminish or disappear altogether. Once executed, trades will be matched and given up to a central clearer, like Ice or LSE.

Wolseley expects that liquidity will increase but will, at least initially, be concentrated in a smaller number of contracts. Exchanges or trading venues will be in a strong position to identify gaps in the range of contracts on offer and, where they have branded index capabilities, will be able to launch credit derivative contracts.

Before long we will see a rapid increase in the number and size of credit-based exchange traded funds (ETFs). Here, the big asset management companies are best placed to design, sponsor and distribute new ETFs, further undermining the hegemony of the banks.

This credit market is different from the one we have come to know (and love) – but it will serve. It should be dynamic and flexible and there will be time and space for innovation. It may be that Rolet and the LSE can seize a significant place in it, or it may be that their focus is really elsewhere, which will leave the likes of Ice to plod towards this future. But whoever provides the venue and infrastructure, Wolseley hopes that you will prosper in it.

Wolseley is a leading practitioner in the credit market. Feedback is welcome at wolseley@creditflux.com