Interview with Rainer Riess, managing director of the Frankfurt Stock Exchange.
Deutsche Borse, the operator of the Frankfurt Stock Exchange (FWB), and the London Stock Exchange (LSE) are tacitly regarded as rivals. Which makes all the more interesting the data provided by the World Federation of Exchanges (WFE): for the first time in history the FWB outstripped the LSE in terms of total shares trading to become Europe's number one.
In the period between December 2008 and February 2009 Frankfurt outstripped London by $60 billion although four times fewer companies are listed with the FWB than at the LSE. The outlook for the European stock market and Deutsche Borse in particular is discussed by the managing director of the Frankfurt Stock Exchange Rainer Riess in an interview with RBC Daily special correspondent Igor Pylayev.
Q.: How do you account for the fact the Deutsche Borse moved into first place in Europe in terms of securities trading in the period from December of last year until February 2009?
A.: Normally we don't talk much about rivals and we do not want to stress that we are better than they. But apparently during the crisis Deutsche Brose and Frankfurt as the financial centre have proved to be more stable compared with other financial centres. Let me cite just two examples. In London settlements are handled by the commercial banks, the so-called payment banks. A broker bank conducting settlements after completing a deal must have an account with at least one of these payment banks. These payment banks, like any other private bank, may go bankrupt. In Frankfurt, settlements are effected through the accounts of broker banks with Deutsche Bundesbank or the European Central Bank. In Germany we have always insisted on regulation of hedge funds. In Anglo-Saxon countries this position was rejected.
Speaking about the LSE in principle, we do not consider it to be our direct rival because its activities are confined mainly to the equity market. We are active in other sectors such as the market of derivatives and we perform settlement and depository transactions; on that count we have long been ahead of London. In addition, Deutsche Borse has always had a different strategy in the equity markets than the LSE: traditionally we put the stake on technical efficiency; our main aim is to make sure that after issuing paper on the FWB that paper should be traded actively in the secondary market. We have never put our stake on companies with small capitalisation like the alternative LSE floor, AIM, accordingly we do not have the problems that AIM now faces. There many companies are delisted or go bankrupt. On that score we have always adhered to a more conservative strategy and it has paid off.
Q.: How will that affect your future work with the Russian issuers? Before the crisis many of them preferred to work with the LSE.
A.: We are aware of great interest on the part of Russian companies, especially the energy sector, in being listed in Frankfurt. This is the result not of the last three months but of several years. Deutsche Borse is the only exchange in the world that has its office in Russia. We have long been promoting the effectiveness of our clearing and settlement systems and the liquidity of the shares traded at the FWB.
Q.: Much higher than at the LSE...
A.: Yes. For many issuers this is an argument in favour of being listed on the FWB. In the longer term it is important for trade between Moscow as a financial centre and Europe to be liquid. We have done some serious work in that direction, for example, there is a bridge between the NDC and our clearing house. We want European shares to be traded at MICEX and the RTS. On the other hand, American and European investors have always shown a keen interest in the shares of Russian issuers. We rate our position fairly highly because we hope to be able to render services to Russian investors in purchasing foreign papers and vice versa.
Q.: In addition to energy companies what other Russian issuers seek to be listed on Deutsche Borse?
A.: Telecoms companies, metallurgical plants and consumer sector firms. In addition, Western investors may be interested in companies that develop new technologies, for example, in energy saving. All the companies involved now or in the future in modernising the Russian infrastructure may be of interest to European investors and therefore have a good chance of being listed in Frankfurt.
Q.: In this connection what do you think about Prime Minister Putin's announcement that the Russian authorities would fight the crisis by providing financial support for infrastructure projects?
A.: In this instance the goals of the Russian leadership are the same as those of the German authorities. Germany also plans to invest significantly in the development of infrastructure. I believe that the Russian Government's plan to turn Moscow into an international financial centre is absolutely correct and can be regarded as investment in infrastructure.
Q.: When can one expect a Russian company to float its shares at Deutsche Borse for the first time after the crisis? No matter whether it is an IPO, private placement or the placement of depository receipts.
A.: This is a difficult year, but we hope that before the end of 2009 several Russian companies will go through at least a technical listing, i.e. will issue their receipts. IPO is not yet interesting for many companies because the shares are relatively cheap. Until we see real long-term stabilisation in the world financial markets, including stock exchanges, it is hard to expect IPOs. On the other hand, many companies that consider technical listing are looking at Deutsche Borse because being listed with us will help them to effectively trade in depository receipts, which is important for investors.
Q.: How do you see the future of the world stock market?
A.: We live at a very interesting time. The financial crisis has become a stress test for the whole financial structure built over the past decades. We have seen markets that have not withstood the test: in the first place the money market and the credit market where there are still problems with determining the real value of assets. Access to these markets is still limited or closed for many participants. For the world stock exchanges the biggest stress test was the bankruptcy of the largest investment bank, Lehman Brothers. However, exchanges by and large have coped with the test and secured their positions as market players. This has shown again the importance of openness and transparency of financial markets as well as of having an effective clearing house.
Deutsche Borse has its own clearing house, Eurex Clearing, the largest in Europe, and that is undoubtedly a competitive edge of our exchange. Eurex Clearing handles a large amount of risk assessments for shares, bonds, derivatives and REPO transactions: the annual trading in these financial instruments is several times the size of the European GDP. The crisis has shown that many market participants have become aware of the advantages of working in open and reliable markets such as Deutsche Borse. Speaking about the market of derivative financial instruments, which many investors have recently complained about, one has to bear in mind the following: the derivatives that were traded in stock exchanges have acquitted themselves well and have enabled investors to quickly transform their risks. The players in the market that have faced problems have bought derivatives in over-the-counter market, or OTC. Our subsidiary, Eurex Clearing, will make an offer to market players before midyear to handle settlements on OTC instruments.
Q.: How will that benefit clients?
A.: It's security. Instruments will be calculated inside the clearing house and that would remove the risks of partners.
Q.: There are many small exchanges in Europe and elsewhere. Do you think the crisis may change the shape of that market through mergers and takeovers of weaker players by stronger ones?
A.: I think the process of consolidation of exchanges may begin in Europe. Of late Europe has sprouted many independent trading systems which are sustaining losses because of the crisis. Many of the systems lack state-of-the-art technologies and have no clearing structures. Obviously in times of crisis demand for the services of such systems on the part of investors tapers off: investors want security and reliable clearing.
Q.: Considering that Deutsche Borse has the largest clearing house in Europe can one expect that it will become the biggest player in the mergers and takeovers market?
A.: We believe the process of consolidation will take place. But what will be in it for us economically is hard to say. For example, in December 2007 we bought the ISE, a major American options exchange: the main stimulus for the shareholders was to secure the Deutsche Borse position in the future, especially in terms of deriving additional profits. We will consider all the other possibilities from this angle. By the way, Deutsche Borse capitalisation topped 10 billion euros again recently.