European diversified financials – Barclays research
2014 suggests volume stabilisation but not significant rebound, Daniel Garrod
and Toni Dang from Barclays comment.
Certain asset classes such as Cash Equities and Equity Index volumes are recovering but more FICC-oriented products remain in decline. The stimuli from QE tapering and European regulatory reform appear to be pushed out to later 2014 or even 2015. As such, we believe FY14 is likely to be a middling year overall, with volumes stabilising but not significantly rebounding for our liquidity names. The LSE remains our top pick due to its accretive LCH acquisition and diversification towards Information and Post-trade Services. ICAP is also rated Overweight due to its potential to benefit from reform of interest-rate swaps trading. Tullett Prebon remains an Equal Weight, Deutsche Boerse an Underweight due to continued negative EPS momentum and cost weakness.
FICC products face headwinds, some rebound in cash equities/index derivatives: Volume outlook appears somewhat polarised between more encouragement for Equities but significant declines for FICC products. For 1H 14 FICC volumes are likely to face tough comparative months yoy. FX volumes for Jan 14 are down -38% yoy on ICAP’s EBS platform. Eurex Fixed Income derivatives are -25% yoy. In comparison Jan’s Cash Equities ADV on the LSE has recovered 18% yoy and Equity Index trading on Deutsche Boerse is up 22% yoy, although this has faded to +3% so far for February.
MIFIR advocates pro-competitive reform for clearing: In Jan 14 trilogue agreement was reached for MIFIR, Europe’s main trading reform regulation.
The key surprise was a more pro-competitive stance than expected towards open-access to clearing and forced index licensing. The timetable towards implementation is likely to be lengthy (entry in force in Q2 14 but implementation not until end 2016). Furthermore, a vertical silo clearer can potentially restrict open access until 2019, hence this impact is unlikely to bring down pricing near-term. Elsewhere the market awaits a precise timeline for compulsory clearing of European OTC derivatives. Threats of Financial transaction taxes (FTT) are re-emerging but their extension to derivatives remains unlikely.