A NEW EXCHANGE TAPESTRY.

Hans-Ole Jochumsen, executive vice president of Transaction Services Nordics for The NASDAQ OMX Group and president of the Federation of European Securities Exchanges (FESE) and president of NASDAQ OMX Nordic discusses how the group is meeting the new challenges.

How do you deal with the onslaught of regulation?

I think it is difficult to find another historical period where there has been so much change in regulation and one that will have such an impact on the financial services industry. It is not only about EMIR (European Market Infrastructure Regulation) but also MIFID II, the Market Abuse Directive and the Financial Transaction Tax. We try to influence the outcome and last year we opened an office in Brussels because we realised we needed to work with the Commission, the Parliament and the Committee on Economic and Monetary Affairs (ECON) on so many different levels. Also, as president of the Federation of European Securities Exchanges I follow all the developments very closely.

You have noted there are both challenges and opportunities. What are they?

We have upgraded our technology and risk management systems and have just introduced a collateral management service. In the past, we outsourced the function but in order to be EMIR compliant we need to handle this function in-house. Last year we moved the clearing business to a single facility based in Stockholm because the industry is about scale and we want to leverage our technology across all facilities. In line with EMIR we’ve also changed the structure and have implemented a member-financed default fund for the first time. We also have to create a separate legal entity for our clearinghouse with independent directors and an independent risk committee.

Our stated ambition is to become a leading player, providing trading and clearing across multiple asset classes such as equity derivatives, commodities as well as Nordic products in fixed income, especially interest rate swaps. We are already clearing Swedish interest swaps. The volume is limited at the moment because we are in the middle of managing the process with clients. I think there will be a gradual increase in volumes and our plan is to expand the product scope to, for example, include basic swaps and overnight index swaps denominated in Swedish krona. Later in 2013 we also plan to clear interest rate swaps and related derivatives denominated in Danish kroner, Norwegian krone and euro. The deadline for mandatory clearing may still be unclear but we are ready and prepared.

What plans do you have for other asset classes such as equity derivatives?

What we’ve seen since MiFID is increased competition in cash equities, and we believe the next wave of competition will be in derivatives. Our response has been to launch NLX (the derivatives venue trading interest rate contracts) and make other investments so we that can be on the frontline when things start moving. This is why last year we bought a 25% stake in the Dutch trading venue, The Order Machine (TOM), a three year old platform that trades Dutch, Belgian and French stocks and associated derivatives. It currently accounts for around 20% of Dutch options contracts, a significant market share in one of Europe’s most active options markets.

The initial focus will be on developing the Dutch market but our goal is to build a pan-European equity derivative business. We think there are good signs for the future and we have a five year option to buy up to 50.1% to give us majority control. The rationale is the same as for our other businesses in that we want to be able to use our scale as an advantage and offer cost-effective solutions to clients. For example, both NLX and TOM will use the same data centre in London.

What stage are you with NLX?

We plan to launch it this year. It will offer a range of both short-term interest rate (STIRs) and long-term interest rate (LTIRs) euro- and sterling-based listed derivative products. It will also provide competitive execution and clearing fees and significant margin efficiencies, using NASDAQ OMX Genium Inet technology and a partnership with LCH.Clearnet.

What are your plans in the power market?

We are looking to expand in the German power market, which is the largest in Europe. We have increased our offering to include monthly, quarterly and yearly contracts as well as German options. This will supplement the clearing services we already offer for the Nordic power market. We see further opportunities in both markets as well as the UK.

What was the reason behind the acquisition of Thomson Reuters’ investor and public relations units?

We just got regulatory approval and the integration planning is at full speed. Adding the Thomson Reuters portfolio to our offering will help diversify the corporate solutions business by adding $150m in revenues and around 7,000 customers. The group offers online information, multimedia and tools for investor relations and public relations professionals.

What do you think about the merger between EuroCCP and EMCF?

With this transaction we’re creating a cash CCP that will offer our Nordic clients substantial collateral efficiencies, in addition to new innovative clearing services. We’re also making sure that our clients can clear almost their entire Nordic equity flow within the same liquidity pool. Over 90% of the Nordic flow can be cleared through the new CCP. As a shareholder in the largest cash CCP in Europe, we will have even better possibilities to influence the clearing industry to develop in a direction that we think will benefit our Nordic client base.

Do you envision taking part of any consolidation in light of the possible merger between ICE and NYSE Euronext?

We would of course have to evaluate the Euronext business case if the deal would mean that it becomes available. That however doesn’t necessarily mean we would bid on it. It’s difficult to gauge now as it is likely to be a lengthy process.

What do you think are the main challenges facing the industry? I think the decrease in the initial public offerings market is a big problem and is connected to the Eurozone crisis. The other great challenge is the capital requirements that banks are facing. They are reducing their loans and as a result, small and entrepreneurial companies which are viewed as risky are not getting the necessary funding to develop their business. There needs to be out-of-the-box thinking in how to improve the situation. One concept that’s being discussed is to harmonise the corporate bond market across Europe. Each country currently has its own set of rules. Another is the impending Green Paper from the European Commission which addresses the long-term financing of the European economy.