The London and Frankfurt Stock Exchanges

Part of the debate – in the House of Lords at 5:30 pm on 24th May 2000.

Alert me about debates like this

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 5:30 pm, 24th May 2000

My Lords, I have to start with an apology. The Takeover Panel stole my vocal chords last week and it has not had the grace to give them back again. If I have difficulty in communicating, noble Lords must blame the Takeover Panel and not me.

It has been a remarkable debate. The noble Lord, Lord Blackwell, said that up to his speech we had achieved consensus. We achieved consensus virtually all the way through the debate and without being boring. That is quite an achievement. We did so without repeating ourselves and while providing an opportunity for my noble friend Lord Layard to make a quite outstanding speech which contributed not just to this debate but to my thinking about the basic economic issues lying behind the subject matter of this debate. We must all be grateful to the noble Lord, Lord Lamont, for making this possible.

First, I shall set out the Government's stance on the merger and then talk about some of the regulatory issues and matters related to trading in euros and pension funds. I shall give some thoughts about the blue-chip markets and growth markets. If I have time, I shall then respond to points raised in the debate.

As many noble Lords have said, this merger is clearly part of the consolidation process in European and global equity markets. The noble Lord, Lord Lamont, went so far as to say that that development may make good sense. It is no surprise that the London Stock Exchange, as one of the world's leading equity exchanges, is involved in this process. As the noble Lord, Lord Blackwell, said, if we are moving to global exchanges we are doing so because we have to reflect the creation of international trading portfolios. The exchanges are simply a reflection of the markets in which they operate.

If one has broader and deeper equity markets, one has advantages for companies and investors. Companies have a larger and deeper pool of investors to tap. Investors have a wider range of investment opportunities. All sides benefit from the lower trading costs which should result. Many noble Lords have said that this may not be the end of the game. It is highly likely that in five or ten years' time there will almost certainly have been moves in the direction of greater concentration in exchanges as well as markets.

The terms of the deal to create the iX are a commercial matter for the parties concerned, subject to their obtaining the clearances from the relevant regulatory authorities. Our interest as a nation, as a society--if I may be so bold as to agree again with the noble Lord, Lord Blackwell--is to look for an optimum market outcome rather than more temporary issues.

There has been reference to the terms of the merger. Much of it is still not known. Perhaps the Stock Exchange and the Deutsche Bo rse were slow off the mark in making their intentions clear. There have been criticisms along those lines, with some justice. If they are going to go ahead, and if the London Stock Exchange membership is going to confirm the decision of the supervisory board of the Deutsche Bo rse, the London Stock Exchange will have to satisfy its members that it represents a good deal, as well as providing the necessary assurances to the regulatory authorities. It is difficult for me to comment on a deal which is still in progress and on which many of the details are still not known. Those questions are for the Stock Exchange rather than the Government. The noble Lord, Lord Desai, said that it would be premature for us to answer. It is more than simply premature. They are questions which it is in principle inappropriate for us to answer.

I was interested to hear the noble Lord, Lord Saatchi, in his interventionist mode suggesting that it was a responsibility of government to become involved in the process of the merger. I find it difficult to see how we should do so.

I turn to the regulatory issues. It has been made clear--the noble Lord, Lord Saatchi, did so when quoting from the FSA--that the regulatory authorities in Britain and Germany are working together. They are considering the practical implications. They will both have to be satisfied with the regulatory arrangements if the merger is to proceed. However, the broad outlines are already clear. The blue chip market will operate out of the United Kingdom; it will be subject to UK regulation. It will be a recognised investment exchange in the UK. The noble Lord, Lord Blackwell, wanted reassurance on that point. He can have it.

The noble Lords, Lord Northbrook and Lord Newby, raised this issue. It is not proposed that the FSA should perform a single regulator function for both the UK and Germany. There is some need for movement in the German regulatory regime. But it is clear that that is already happening. Werner Seifert is quoted in today's Wall Street Journal as saying that the Deutsche Bo rse is moving in that direction. He says that, beginning next year, German companies must report results quarterly rather than twice a year if they want to qualify for the Xetra tax index of 30 bluechip companies. I do not think that it needs heavy-handed intervention from the Government or the Treasury. The impetus towards harmonisation of regulatory regimes will happen on its own.

It is not that there is difficulty about operating as they are. I made it clear during debates on the Financial Services and Markets Bill that that already happens with the OM group, which owns the OM Stockholm exchange, under Swedish regulation and the OM London Exchange, which is a recognised investment exchange in the UK. It works perfectly well there. I repeat what I said when we considered amendments to the Financial Services and Markets Bill. We have no doubt that the provisions of the Bill relating to the recognition of exchanges are able to cope with structures such as the proposed international exchange.

The details of which companies will be listed have not yet been sorted out, but no companies will be forced to move their listing from one company to another. German companies listed in Germany will be traded in the same market as UK companies listed in the UK. People in the UK can already trade German shares. They are aware that the listing regime is slightly different. The fact that shares are traded on the same market does not necessarily mean that investors will automatically assume that the same listing regime applies.

I turn to the issue of trading in euros. To some extent, the fears that were expressed in the wording of the Motion when the noble Lord, Lord Lamont, first tabled it have been allayed by the clarity we now have from the London Stock Exchange that it will be for the market to lead. After all, the stock market is there to serve its customers. It will follow what its customers want to do in relation to the currency used for trading shares. Even if the majority of share trading moves to euros, the Exchange will continue to provide prices of UK stocks in sterling.

My noble friend Lord Lea of Crondall is sceptical about that. I can say only that on that issue we shall have to wait and see. While not in any way diminishing the authority with which my noble friend Lord Layard spoke, I do not believe that issues for the UK's entry into the euro arise from the merger. The position is unchanged. It is as set out by the Chancellor of the Exchequer in October 1997 and confirmed by the Prime Minister in February 1999.

I turn to pension funds, which were a proper concern of my noble friend Lord Lea. If the trading currency for a particular stock changed from sterling to euros, we would not expect that to impose a significantly greater amount of currency risk to most investment funds. Already 40 per cent of UK investment fund assets are in non-sterling securities. Approximately 10 to 15 per cent of those are in eurozone currencies. My noble friend Lord Lea made a good point about the need for a new series in financial statistics and I am sure that the Office for National Statistics will pay attention to what he said.

The review of the minimum finding requirement will be wide-ranging and take into account several important developments since the original test was formulated. That will provide an opportunity for issues such as this to be addressed. Short-term volatility in the stock markets may be an issue. To the extent that the quoting of stocks in euros has any effect on this, it will be carefully considered.

I turn to the issues raised in the debate particularly by the noble Lord, Lord Lamont, who was kind enough to give me notice of the questions he raised. However, some of his points were also raised by other noble Lords. He asked, first, about medium cap stocks, which are not quoted on the London bluechip exchange or the Frankfurt high growth companies market. I understand that the iX will continue to run national markets in addition to the pan-European markets. Therefore, British companies which do not fall into either the blue-chip or high growth categories will still be quoted and traded on the London exchange.

The noble Lord asked about the effect on London's IPO business. I believe that he answered his own question because I am sure he was right in saying that it will be market driven. There cannot be a guarantee that when growth companies become large companies they will return to London. However, the intention is to retain national markets as well as the pan-European markets. IPO's will continue to take place in London. While the pan-European growth company market will be operated in Frankfurt, it is not necessarily axiomatic that all such IOP business will be conducted out of Frankfurt rather than London.

I return to UK regulatory requirements and the Code of Corporate Governance, to which the noble Lord, Lord Lamont, referred. We do not yet know the details of the standards which will be applied in the various markets. However, the current position is that foreign companies with a listing on the London Stock Exchange are not required to comply with all the provisions of the UK listing rules. Therefore, there is not absolute uniformity and any changes which might take place may be a difference in degree rather than in kind. As I have said, the European blue-chip companies based in London will be a UK-recognised investment exchange under the Financial Services Authority.

The noble Lord asked whether small technology companies will be able to side-step UK standards of reporting and accounts by having their quotation in Germany. Again, that question answers itself. Clearly, UK registered companies must follow the requirements of UK company law, regardless of where they are quoted and traded. As he said, the customers of exchanges take the standards of regulation into account when deciding where to do business. Such companies will have to take account of what the market wants and whether by departing from accepted practice they lost their attraction to pension funds.

The noble Lord raised an important point about transparency. I agree that there are differences in transparency between regulatory requirements in Britain and Germany. I do not know--I do not believe that anyone yet knows--whether the proposed merger will lead to more block trades. However, the intention is for the London Stock Exchange to continue to follow the existing requirements whereby members doing bilateral trades off the order book would need to report the trade to the Exchange.

That brings me on to the important issue of clearing and settlement, where there are potentially huge advantages and savings if existing practices can be extended. The noble Lord, Lord Northbrook, properly referred to the need for a central counterpart. My noble friend Lord Barnett made a similar point. The proposed merger does not cover clearing and settlement, but the boards have said that they consider that settlement should be delivered ultimately on a consolidated pan-European basis. They will be consulting users for their views on the management, ownership and structure of potential settlement infrastructure. However, in the expectation that there will be significant consolidation and rationalisation over the coming years, the merger is the first step on that road.

I was asked whether this meant the end of stamp duty. We always keep the position under review, but stamp duty is chargeable on trade in the shares of UK registered companies regardless of where those shares are traded, unless the season ticket charge has been paid. Therefore, one cannot avoid stamp duty simply by moving trading from London to Frankfurt. My noble friend Lord Haskel referred to the ADR loophole. That is supposed to be dealt with by the season ticket provision, so I do not believe that the noble Lords, Lord Barnett and Lord Saatchi, have reason to believe that stamp duty will somehow become unviable as a result of the merger.

We come now to the more technical issue of the trading platforms. I am not sufficiently expert to know whether Xetra is better or worse than SETS. The noble Lords, Lord Lamont and Lord Northbrook, asked who would pay the costs of any compulsory transfer from SETS to Xetra. I am sure that the Stock Exchange must tackle that issue if it is to convince small brokers that the merger is in their interest.

I have already referred to the issue of trading in euros, which has been resolved by the clearer position that the Stock Exchange has taken.

The noble Lord, Lord Lamont, asked whether there was a remit for competition authorities in Brussels. Strictly speaking and literally, the merger falls below both the asset and turnover thresholds for consideration by the Commission in competition terms. Therefore, there is no power for them to intervene. As regards whether the UK or German authorities will feel it necessary to intervene, that is another matter and it is one for them to determine.

Perhaps the central question for most outsiders--noble Lords were notably impartial in their comments today--is: what does this mean for the financial community in London? Are we selling our birthright for a mess of pottage by keeping the bluechip market and allowing the growth market to be located in Frankfurt? At the moment, of course, blue-chip shares form by far the bulk of the market. The FTSE 100 stocks and the top 40 stocks on the Deutsche Bo rse form approximately three-quarters of the combined market or capitalisation of the two exchanges. The Euro top 300 index of blue-chip companies represents a similar share of total European stock market capitalisation. Blue-chip shares also represent the great bulk of trading in equities. The share of the market of technology stocks is about 40 per cent, although it is difficult to find definitions which are precise in this area.

The noble Viscount, Lord Chandos, referred to the success over the years of the Neu Markt in growth stocks, against which must be set the losses that have been suffered recently with the decline both in Techmark and in the NASDAQ industries. Clearly, that has a knock-on effect on initial public offerings. However, even if the Frankfurt growth market is likely to see the bulk of IPOs, even though it is true that their growth has been greater in recent years, it is not axiomatic that all that business will move to Frankfurt rather than continuing in London.

The debate this afternoon has been conducted notably with an absence of ideology and in a genuine spirit of inquiry and of genuine intention to contribute to the well-being of our financial markets and of our economy. The Government are grateful for that. I believe that the cautious welcome extended to the merger by noble Lords will be welcomed by those who are taking part in the negotiation. It is well known that the Government do not take a formal position on a merger between two private organisations. However, I am sure that both the Stock Exchange and the Deutsche Bo rse will be grateful for the views that have been expressed this afternoon.