London Stock Exchange plc and OM AB announce the formation of EDX London, a jointly-owned business for the development of a London-based international equity derivatives business. London Stock Exchange will have a 76 per cent shareholding and OM 24 per cent.
EDX London will acquire the existing Scandinavian equity derivatives exchange business owned and operated by OM London Exchange, a subsidiary of OM. EDX London will use technology provided by OM, principally CLICK™ for derivatives trading and SECUR™ for clearing.
It is intended that all contracts traded on EDX London will, as soon as practicable, be cleared through London Clearing House.
Subject to approval as a Recognised Investment Exchange by the Financial Services Authority, EDX London intends to begin trading in the second quarter of 2003.
EDX London - the market opportunity
EDX London plans to develop a service specifically for the trade confirmation and clearing of sufficiently standardised equity derivatives transacted over-the-counter (OTC) between wholesale market participants. Such a facility is not currently available for OTC equity derivatives business in London, and discussions with LCH on its delivery are already in progress.
The OTC service will provide significant efficiencies for market participants, including capital and operational savings. EDX London will build this service in very close collaboration with the OTC market participants, many of whom are members of LCH.
EDX London will also build on the trading of Scandinavian derivatives products currently transacted through OM London Exchange. In the longer term, London Stock Exchange and OM see opportunities to increase trading through EDX London in a broader range of order book traded equity derivatives and to provide for operational synergies between cash and derivatives markets.
London Stock Exchange member firms will be offered membership of EDX London, adding to OM London Exchange's customer base, and introducing more choice to firms whose business has hitherto been cash market focused.
OM London Exchange, Stockholmsbörsen, Copenhagen Stock Exchange and Oslo Börs have established a linked distribution network operated on CLICK™ - Linked Exchange Clearing (LEC). EDX London aims to expand the LEC concept further to reach a broader range of customers through other collaborating exchanges.
Separately, an agreement has also been reached for London Stock Exchange to adopt CLICK™ for the future growth of its recently introduced market in covered warrants.
Description of OM London Exchange
OM London Exchange, a subsidiary of OM, was established in 1989 and is a UK Recognised Investment Exchange offering exchange services and clearing of Scandinavian equity derivatives. The trading volume has continuously grown since the start. Through the link with the Scandinavian exchanges OM London Exchange is currently transacting some 25 per cent of all exchange traded Swedish derivatives.
OM London Exchange also owns and operates UK Power Exchange (UKPX) and operates Pulpex (a commodity market). These markets will continue to be operated by OM, and will not be included in the formation of EDX London.
OM London Exchange has 84 member firms and the daily trading volumes at OM London Exchange amount to 60,000 contracts. Between 1996 and 2002, estimated CAGR volume growth at OM London Exchange has been 29 per cent per annum.
| % of contract volume (2002 to date) | |
| Single equity options and futures on approximately 70 Scandinavian stocks | 55 |
| Equity index futures and options on the OMX Index, Oslo Bors Index and Copenhagen Futures Index | 45 |
Financial information
London Stock Exchange and OM will establish EDX London with London Stock Exchange holding 76 per cent and OM 24 per cent respectively of the voting and equity share capital. At completion, EDX London will make a payment in cash of £24 million to OM as consideration for the transfer of OM London Exchange's derivatives business.
Revenues and operating profit for the Scandinavian derivatives business during 2001 and for the first nine months of 2002 have been as follows:
| Nine months ended 30th September 2002 | Year ended 31st December 2001 | |
| £ million | £ million | |
| Revenues | 5.6 | 10.6 |
| Operating profit | 0.8 | 2.9 |
Notes
(i): The above financial information has been extracted from the management accounts of OM London Exchange.
(ii): The earnings effect following the creation of EDX London is expected to be broadly earnings neutral, in operating terms, for both parties.
(iii): Revenues include estimated contributions of £1.0 million and £2.2 million respectively from activities related to management of collateral. Income from these activities is likely to reduce when clearing of trades is transferred to LCH.
(iv): For further financial information on OM, see separate OM press release issued today.
Board and Management
EDX London will be managed by Marc Bailey, London Stock Exchange's Director of Business Development, and will have a board of ten directors. Two will be independent, two appointed by OM and six by London Stock Exchange.
Approximately 30 existing employees of OM London Exchange are expected to transfer to EDX London at completion.
Conditions, Regulatory consents and timing
Completion of the agreements for establishing EDX London is conditional on:
(i) the Financial Services Authority's approval of EDX London as a Recognised Investment Exchange for the purposes of the Financial Services and Markets Act 2000;
(ii) Office of Fair Trading clearances; and
(iii) certain OM London Exchange members moving to EDX London.
The conditions to completion must be met no later than 1 July 2003.
Advisors
London Stock Exchange has been advised by Cazenove & Co. Ltd. and OM by Lenner & Partners Corporate Finance AB.
