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The LSEG-HKEX Merger Proposal in Context (11 Sep 2019)

Updated: 11 Sep 2019
Charles Li Direct

HKEX formally announced today its intention to merge with London Stock Exchange Group. We are early in the process so I can’t go into too much detail at this stage, but after many months of consideration we believe we have put forward a proposal that is ambitious, far-reaching, and could have a transformative effect on global financial markets.

Today’s announcement is also a significant milestone for Hong Kong. Our City has shown time and time again that it thrives when competing against the top financial centres in the world, moving from its historic role as a regional centre to a global hub. As China’s economic growth has accelerated, so too has Hong Kong’s role as a vital connector between East and West – and today’s announcement is the next major step on the path of connecting China and Asia with the world.

The details of today’s proposal I am certain will be the subject of much discussion and debate in the weeks ahead, so today I wanted to take a look at the big picture and give today’s announcement more context. 

 

Why does a partnership between LSEG and HKEX make sense? How will it benefit the two companies?

LSEG and HKEX operate some of the most significant financial infrastructure in two of the world’s most important financial markets. Together, they will create a world-leading global exchange that spans Asia, Europe and the United States with a market value of more than US$70 billion. Together, they would provide an unprecedented market connectivity platform for global market participants, unleashing a new generation of opportunities on the world’s first truly global exchange.

As mentioned in our announcement, LSEG is one of the biggest exchanges in Europe, with businesses that are highly complementary to that of HKEX’s.  The combination of the two groups will be a great match, creating a world-leading market infrastructure group with a global footprint that is diversified across asset class.

 

How will this impact global financial markets?

Alongside changes in regulation, M&A has played a key role in shaping the global financial market landscape. The successful execution of this deal would have a profound impact on international markets, bringing benefits to participants and investors from all over the world.

First, LSEG is one of the most well-known, highly respected and successful exchange groups in the world. Based in London, it is a global offshore centre for Eurodollars. Likewise, HKEX is one of the top Asian exchange groups based in Hong Kong, the world’s leading offshore market for Renminbi. A combination of two markets of this size and significance has never been done before and would create a globally-connected exchange group that serves as the leading international platform for financial assets denominated in US dollars, Euro and Renminbi.

Second, LSEG is the world leader in the clearing of fixed income and currency products, while HKEX operates world-leading equity, derivatives and IPO markets. Together, the combined entity would represent a fully vertically and horizontally integrated platform for all asset classes, serving global investors and international companies across time zones and continents.

Third, LSEG is the owner and operator of leading global settlement and clearing services. HKEX is the pioneer and leader of the Stock Connect and Bond Connect programmes that link global capital with the Chinese onshore market, providing a complete and seamless connection based on cross-border net settlement. These two institutions together would create the most important investment platform and risk management infrastructure for the free flow of global capital between the East and West.

Fourth, LSEG provides diversified and sophisticated financial services and products to the most valuable companies and investors in the most developed and prosperous markets in the West. HKEX’s home market is Asia, a vibrant part of the world that is characterised by rapid economic development, the leapfrogging of many established technologies, and the emergence of exciting new industries and companies. The combined group could provide the most comprehensive and international product and service offering to Asian investors, whilst also opening up Asia’s emerging economies, such as China, to provide unlimited long-term capital flows to fund the growth of developed capital markets in the West.

Lastly, LSEG owns a world-leading index business with strong data and analytics capabilities and an extensive and high-end distribution network. Data is also part of HKEX’s ambitions: we are currently looking at the development of a  next generation digital asset trading platform. We intend to inject new energy and vigor into the global financial industry by leveraging the massive amounts of data generated from Asian countries and, in particular, the highly digitised economy of China.

 

What is the strategic significance for Hong Kong, Mainland China and the United Kingdom?

We firmly believe the partnership will strengthen ties between the UK and China, particularly in economic and trade terms. This is a net benefit for Hong Kong, Mainland China, and the United Kingdom

Hong Kong’s status as an international financial centre would be taken to another level, reinforcing the city’s importance to Mainland China and the global community and giving new energy and optimism to its role as a link between East and West.

China benefits from the deal by receiving additional international financial market support as the RMB internationalises and its capital markets become more open. This transaction could help provide new interconnections for stocks, bonds, indices and other financial products, which could be important channels that support China’s full use of the global financial infrastructure.

The transaction is also a vote of confidence in  London and the United Kingdom’s future role as a global financial centre. It strengthens the City’s hand, ensures it will benefit from growth opportunities in Asia and that it plays a leading role in the RMB becoming a major global reserve currency in the future. This deal will inject optimism and excitement into London’s future.

 
Since it is such a natural fit, why have you not proposed an acquisition earlier?

Our Strategic Plan 2019-2021, has three major themes: China Anchored, Globally Connected, Technology Empowered. To achieve our goal of being a truly Globally Connected exchange, we considered our options and felt a merger with LSEG made the most sense.

In reality, there is seldom a perfect time to undertake a merger or acquisition – it’s a combination of timing, vision, opportunity and takes account of a whole host of variables. Given the current uncertainties in global geopolitics and economics, you could be forgiven for thinking that the time would not be now to make a major investment in a cross-border acquisition. However, this is a highly compelling transaction that stands up on its own, whatever the noise, and if we don’t try, then of course by definition we fail. Our experience acquiring the London Metal Exchange in 2012 reminds us that if we have a strong case and a clear vision, if we believe in the benefits, and if we have the courage of our convictions, then we should act.

Today is the beginning of an important journey. We are going to work hard with all of our partners in an effort to bring this transformative deal to life. We believe this is the right thing for our respective businesses, the right thing for our broad array of stakeholders, and the right thing for global markets.

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