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Quadrillion-Dollar London Market Bats Away Brexit Blues

LSE shares have outpaced almost every rival in the past three years.

Quadrillion-Dollar London Market Bats Away Brexit Blues
A London Stock Exchange sign sits on glass in the atrium of the London Stock Exchange Group Plc’s offices in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

(Bloomberg) -- London Stock Exchange Group Plc has defied Brexit gloom to retain the U.K.’s lead in the multi-trillion-dollar swaps business, realized a long-sought ambition to link up with China and nabbed some of the most coveted assets in its industry.

The reward is a soaring stock price, which reached a record this week. LSE shares have outpaced almost every rival in the past three years, including the firm’s former suitor and main European rival, Deutsche Boerse AG, which made a play to lure business from London after the 2016 U.K. vote to leave the European Union.

Quadrillion-Dollar London Market Bats Away Brexit Blues

The 218-year-old exchange’s resilience at one of the City of London’s most difficult junctures in decades is the result of painstaking negotiations with the EU and some strategic acquisitions by its former Chief Executive Officer Xavier Rolet. With the uncertainty over Brexit undiminished, the big question for the bourse is whether David Schwimmer, the Goldman Sachs Group Inc. investment banker who took over the top job 11 months ago, can sustain his predecessor’s legacy.

“Some smart bets by Xavier mean LSE has been reaping the rewards,” said Alasdair Haynes, chief executive officer at Aquis Exchange Plc, a rival trading venue. “The new CEO is in a hugely privileged position -- his performance will ultimately be judged by the share price in three years’ time.”

Schwimmer inherited a winner. The LSE’s role as middleman in complex trades such as interest-rate swaps got a major boost from rules after the financial crisis requiring more derivatives to pass through clearinghouses such as its LCH unit.

Lobbying Europe

Executives worked to protect the quadrillion-dollar business, lobbying Benoit Coeure and Mario Draghi of the European Central Bank last year to keep swaps in London even under a no-deal Brexit, according to people familiar with the matter.

Their efforts paid off, and the move by the European regulators in February to allow euro clearing on both sides of the English Channel under any Brexit scenario was positive for the stock, said Kyle Voigt, an analyst at Keefe Bruyette and Woods.

LSE has unique growth operations like its index and clearing businesses, Voigt said, “and there are not many assets in the exchange sector growing at double digits.”

Several large acquisitions under Rolet are also now bearing fruit, analysts said.

Quadrillion-Dollar London Market Bats Away Brexit Blues

When Schwimmer, a 50-year-old New Yorker, took over the top job in August following the abrupt end of Rolet’s eight-year tenure, he was a lot less famous than his namesake actor in the “Friends” series. While low-key tactics have done little to raise his profile since then, the stock performance suggests investors are comfortable.

Schwimmer has made some strategic but unglamorous acquisitions, increasing the exchange’s stake in LCH and acquiring almost 5% of Euroclear, a settlements business.

Then there was the China link. On June 17, LSE started the Shanghai-London Stock Connect program, which allows companies reciprocal listings. “We are an international company that’s looking over the medium and long term to become more global; that means more in the U.S. and Asia,’’ Schwimmer said at the International Derivatives Expo in London this month.

He ruled out big exchange mergers and said the LSE’s 20-or-so recent acquisitions meant he’s managing disparate cultures. Schwimmer wasn’t available to comment for this article, a spokeswoman said.

Subtle Approach

The new boss’s approach to Brexit has been more subtle than that of Rolet, who told politicians 232,000 jobs were at risk of leaving London. Over the last year, Schwimmer has put in time with EU authorities behind closed doors, holding two meetings with Valdis Dombrovskis, the European Commission’s financial-services commissioner, and two with Steven Maijoor, the bloc’s top markets regulator, according to public records.

Quadrillion-Dollar London Market Bats Away Brexit Blues

Kay Swinburne, vice-chairman of the European Parliament’s economic committee, said the LSE’s decision to move some of its repo clearing operating -- which handles 800 billion euros ($900 billion) a day -- to Paris was greeted warmly by European authorities, who’ve repeatedly sought greater oversight of trading in euros.

Keeping the bigger swaps-clearing operation in London will depend on further U.K.-EU cooperation, she said. “A break in trust among the clearing regulators may force the splitting of the currency ports for clearing," Swinburne said.

There are other headwinds. Equity trading revenue is a weak spot, with a 9% decline last quarter at the LSE’s capital-markets unit. Brexit has battered sentiment for some IPOs, weakened by the high-profile flops of Aston Martin Lagonda Global Holdings Plc and Funding Circle Holdings Plc.

Eric Compton of Morningstar Inc., one of the most bearish analysts covering LSE, sees limited upside after years of growth fueled by Rolet’s deals.

“It’s hard to keep that momentum going, doing transformational acquisitions that play out very well in the years to come,” he said. Rolet’s were “definitely big shoes to fill, so it’s nearly impossible to recreate what he had done.”

--With assistance from Keith Campbell, Marion Dakers and Nicholas Comfort.

To contact the reporters on this story: Viren Vaghela in London at vvaghela1@bloomberg.net;Silla Brush in London at sbrush@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Vidya Root, Paul Sillitoe

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