Decision To Determine Sfe's Future In Global Trading
The Age
Thursday November 11, 1999
There are two discrete but overlapping processes at work that will shape the future of the Sydney Futures Exchange and its role in increasingly global and integrated international securities markets.
The one that has grabbed most of the attention is the attempt by Computershare to grab control of the exchange and the tensions within the exchange's governance structures that has been exposed.
The other is the less high-profile shift from the exchange's traditional open out-cry trading floor environment to screen trading last week, and its steady progress towards demutualisation.
While the issues are notionally independent of each other and could be resolved independently, they are brought together by the coincidence of their timing and the potential convenience of their merger.
The SFE is steadily moving towards demutualisation, with an informal target date for completion of the process set for the middle of next year.
That process is complex and potentially contentious because the exchange has four classes of membership to satisfy and from which to gain approval for its restructuring. It is made more difficult because some members have been rendered less relevant by the move to screen trading.
There will be those who wish to exit the industry and who view the demutualisation process as their exit mechanism. At the same time, the large brokers who dominate SFE's governance and activity on the exchange want the new structure to better reflect their role.
In a sense that is where Computershare's role cuts in.
Computershare's primary interest in SFE is as a supplier of trading and order routing systems. It would like to be SFE's supplier because it needs the credibility of one of the world's credible future exchanges to demonstrate to the rest of the market that it is a serious player in exchange systems.
A secondary objective is that the combination of the enhanced ability to convince SFE to acquire its technology and ownership of an exchange would help Computershare capture added value, in much the same way that it progressed from being a supplier of technology for share registries to being an operator of the registries themselves.
Computershare's objectives are not necessarily ones the SFE would share. From SFE's perspective, the choice of supplier would normally be driven by the best available technology rather than by availability of external capital.
There are also strategic dimensions to SFE's position. Computershare is a late entrant into the market. Eurex, an alliance between Deutsche Borse, other European exchanges and the Chicago Board of Trade, and Globex, sponsored by the Chicago Mercantile Exchange, has already emerged as global technology platforms for futures trading.
For the SFE, it might make more sense to join a global platform, and plug into its customer base and order flows, than to go with its own new and competing platform. That is a conclusion reinforced by the knowledge that the same handful of international investment banks who are the major customers of Eurex and Globex provide about 75per cent of SFE's own order flows.
SFE has had discussions with both groups. Its status as the largest futures exchange in this region, and Australia's positioning as a stable and attractive gateway to the region, makes it an attractive partner for them.
The ASX and Computershare offers, however, altered the SFE dynamics because they put forward a solution to the problems the exchange faces in tidying up its governance structure and moving smoothly through to a demutualisation.
There are two basic models for demutualisation.
One would be to simply distribute shares in a demutualised SFE, list it on the ASX, and then allow the members themselves to decide whether to hold or sell. It would be analagous to the structure the ASX used to demutualise and list.
That would still involve the difficult issue of distributing those shares to the various classes of members in a way that satisfied them.
The alternative is to give those members who want the option of cashing out their membership - mainly the members adversely impacted by screen trading - an incentive to exit the structure.
SFE has about $70million of cash that could be used to grease the process. Computershare, however, has been prepared to put $130million on the table in return for 50per cent of the exchange. Its involvement would make it easier to develop the incentives required to ensure approval for the demutualisation.
The Computershare proposal has been bogged down in discussions with the large brokers who dominate the exchange's governance and trading.
While the big brokers are attracted by Computershare's cash and the disciplining pressure its involvement in SFE might have as a potential competitor to ASX on the context within which their equities activities operate, they don't want to hand over control of the exchange to Computershare and also appear to have some reservations about becoming a captive of a technology supplier.
Over the past month or more they have been attempting to negotiate Computershare's potential equity in the exchange down and their own control of a demutualised SFE up.
Given the need to satisfy the other three classes of membership without giving either them or Computershare control, it is a three-dimensional equation that has proved difficult to resolve.
Another complication is that Computershare has made it clear that it will only participate if it has a meaningful involvement and one close to its original objective of a 50per cent interest.
While the large brokers and Computershare are said to be getting closer to an agreement, it is possible the confusion of objectives - the attempt to integrate the demutualisation and the revision of governance structures with an exit mechanism for members and a equity alliance with a technology provider - could compromise the quality of the outcomes.
That is something SFE can't afford. The emergence of global trading platforms and private electronic networks and, given the ASX's inability to acquire SFE, the potential for it to create competing equities-derived instruments, makes it vital that it gets its house in order quickly.
Its successful shift to screen trading and current positioning creates the potential for SFE to be the Australasian and Asian piece of the global futures trading jigsaw. At the speed at which global securities markets are evolving, however, if it doesn't grab its opportunity, or gets the structural or technology bets wrong, that opportunity could pass it by in an instant.
e-mail: bartho@theage.fairfax.com.au
© 1999 The Age