Borsa Italiana joins the consolidation game

Borsa Italiana has finally decided to join the game of market infrastructure consolidation in Europe.

On July 17 the Italian stock exchange received approval from the majority of Monte Titoli’s shareholders to acquire the Italian central securities depository – Italy’s custody, clearing and settlement house. Borsa Italiana has offered Monte Titoli the equivalent of approximately ¤16 a share with 50.6% to be paid in shares and 43.9% in cash (4.1% was previously owned by the exchange). The exchange also has plans to go public in a step that will take it closer to its goal of consolidation in the pan-European arena.

One of the primary reasons for Borsa Italiana’s bid for the central securities depository is similar to that of German exchange Deutsche Börse when it acquired Clearstream earlier this year. Massimo Capuano, CEO of Borsa Italiana, says: “In Italy, as in other European countries, we need to concentrate on consolidating business systems because in this way you can rationalize these systems and create straight-through processing, provide better services to members and also maximize critical mass.”

This kind of consolidation between an exchange and a clearing and settlement house is referred to as a vertical model and is one that is viewed unfavourably by many European and US industry players. Such participants believe that it creates a monopoly, run by a single entity in one country, and prevents competition.

The divide between the preferred model for consolidation among exchanges and clearing and settlement agencies has widened further, affecting the long-term structure of the market. Not only has the Italian exchange decided to acquire the country’s clearing and settlement house, but the international settlement agency, Euroclear, and London’s CSD, CrestCo, have also announced their plans to merge.

Consolidation between Euroclear and CrestCo is in line with what is known as the horizontal model whereby settlement houses join forces with each other. There is also speculation that the London Clearing House and France’s Clearnet will merge. This would bring the clearing house into the orbit of the Euronext exchanges, as Euronext controls Clearnet, and would add to the exchange’s mixed model.

Pragmatic about models

Capuano says he’s not bothered by the debate about the horizontal and vertical models. “It’s better to see where can we find the most significant business model for creating value for our stakeholders. This can happen in either the vertical or horizontal model,” he says. The major stakeholders in the exchange are currently also the major investors in Monte Titoli and are, therefore, primarily interested in maximizing shareholder value, rather than necessarily maximizing market efficiency.

Borsa Italiana’s plans to go public would bring it in line with other exchanges such as the London Stock Exchange, Euronext and Deutsche Börse which have all listed over the past two years. Spain’s Bolsa de Madrid is also expected to complete an IPO in the first half of next year. “When the other players, and sometimes competitors, are already listed you have to think about your own position with regard to an IPO,” says Capuano.

He argues that consolidating with Monte Titoli and taking the exchange public are important steps to creating a company that can compete with major European exchanges and be in a favourable position to participate in European consolidation. Roberto Oggioni, managing director at ABN Amro Rothschild, agrees. “Any future corporate activity will be made easier if they have a listing and traded stock,” he says.

However, it will not be as straightforward for the Italian exchange to list as it has been for others. The Italian regulator, Consob, will first have to approve the listing. Borsa Italiana’s Capuano says: “Consob says the Italian law doesn’t allow the IPO of Borsa Italiana. We are trying to convince them that it does and if not we will have to try to get the law changed.”

Luigi Spaventa, Consob’s chairman, explains in a report: “The listing of stock exchanges on markets that they themselves manage raises the problem of how stock exchange management companies can perform on themselves the functions of public interest – admission to listing and subsequent supervison – they are entrusted with by law.”

Although the market cannot expect to see an IPO of the exchange this year, Capuano is eager for it to take place soon. He says that once Borsa Italiana has been made a public company it will be able to pursue alliances, if not consolidation, with other European exchanges. “Being public, if you take Euronext, you can significantly achieve more flexibility in terms of alliance,” he says. In order to gain access to other markets, to build a pool of liquidity and to increase the value from cross-border activities for its intermediaries the exchange will need to participate in European consolidation. “In the future of Borsa Italiana, I see a solution that could put us with other exchanges into a European exchange.”