The purchase of the LME from its members gave HKEX a global presence outside of Asia and was deemed controversial by some in the metals market at the time the deal was announced.
Now HKEX has announced its intent to broaden its global presence further by acquiring the LSEG, raising eyebrows for a second time.
“I can’t really see how any antitrust authority would approve having the two big London exchanges under one umbrella,” one trader said.
“It is less about what HKEX and the LME want to do but more about what the Financial Conduct Authority will say, it’s one to watch,” a second trader said.
Sources close to the matter told Fastmarkets that there are no regulatory issues with HKEX owning both the LME and the LSEG.
“The factual position is that there would clearly be no overlap in the businesses. Both are leaders in their own individual fields,” a spokesperson for HKEX said.
HKEX and the LME declined to comment further given that the proposal is still in its early stages.
The LSEG responded to the offer by saying it was unsolicited, preliminary and highly conditional, noting that there have been failed mergers of the same variety in the past.
A $31-billion merger between LSEG and Germany’s Deutsche Börse fell through in March 2017 following a European Commission anti-monopoly ruling, which also blocked the sale of the Paris arm of LSEG's London Clearing House (LCH) to French bourse Euronext.
Regulators in the United States also quashed an attempt by a group of China-based investors to acquire the Chicago Stock Exchange in 2018.
“I don’t foresee any problems if HKEX were to pursue the purchase of LSE; they will be able to work side by side and there are no rules to say this is a problem,” a market source said.
“The deal most certainly can go through and it will be better than the proposed Refinitiv deal,” a source close to the merger discussions said, referring to LSEG’s proposed $27-billion merger deal with global financial solutions company Refinitiv.
A condition of HKEX’s proposal is that the LSEG’s deal with Refinitiv must not be completed.
HKEX said on September 11 that, under its ownership, LSEG's businesses will continue to be regulated by their existing primary regulators and that it had begun conversations with certain regulators in the United Kingdom and Hong Kong.
Fueling political fire?
Political uncertainty could be the biggest headwind to the proposed deal, with both the UK and Hong Kong currently mired in political upheaval.
Brexit has cast a long shadow of doubt on the UK’s global market position and the possible merger of the LSEG with an international company will spark extra scrutiny.
“People were unhappy when the LME was sold out internationally and people feel the same about the [London] stock exchange. Will they let the stock exchange go into the same hands? I doubt it,” a third trader said.
“I think this will die over time as politically it’s too hot to get through the politics. It’s one thing buying the LME and another buying the LSE,” a second market source said.
“Most of the public had never heard of the LME [when HKEX bought it]; everyone and his dog has heard of the LSE,” he added.
Some market participants argued that the proposal could highlight HKEX’s commitment to London as a financial center, even in turbulent times.
“You could even see it as a vote of confidence in the UK, that it is happy to be involved even if by the time the deal is through Brexit is complete,” the first market source said.
But Hong Kong is in a politically precarious position itself, plagued by violent protests over the past few months, and the majority of market participants find it hard to put a positive spin on the political situation looming over the HKEX-LSEG deal.
“I don’t think [HKEX buying the LSEG] reassures anybody in relation to Brexit; it looks like a desperate effort by Hong Kong to escape both the fact of its burning streets and the reality of its failure to make an impression in China with their acquisition of the LME,” a third market source said.
“It would be seen as a sell-out by the UK public, and it would annoy the US, [which is] in a trade and technology war with China, at a time when the USA is the great hope of the Brexiteers,” he added.
Consolidation of clearing houses?
If the deal does go through it could lead to some streamlining of the LME’s technology, especially the clearing houses.
The transaction would mean "significant synergies," the HKEX noted in its September 11 announcement.
“In particular, the migration of HKEX’s trading and clearing platforms to LSEG’s technology, the revenue uplift in key businesses from cross-selling and innovation opportunities and a reduction in HKEX’s capital expenditures in connection with existing systems and future investment plans all present strong synergy opportunities,” it said.
Both the LSEG and the LME have their own clearing houses. LMEClear was launched in 2014 and was the first clearing house tailored specifically to the metals market, while the LCH provides clearing services for a diverse range of assets, including FX, cash equities, equity derivatives and soft commodities.
“It is highly likely that there would be a consolidation of the clearing houses because it makes sense,” the first market source said.
Sources noted that there would be no need for the technology surrounding both clearing houses and the personnel. A consolidation of the two clearing houses will raise even more questions in the market.
“There is no way the Competition and Markets Authority (CMA) will leave the LCH in the same shop as LMEClear, especially if it’s Chinese owned,” the third market source said.
“LMEClear is the place you would see the big changes. There would be no need for both but that won’t make people happy,” the third trader said.
Perrine Faye in London contributed to this report.