LSE has 'free option' with Sonia, suggests Berenberg
London Stock Exchange Group
8,984.00p
17:15 19/04/24
When markets switch from using the Libor index in 2021 to Sonia, the 'sterling overnight index average' as an interest benchmark, it will give the London Stock Exchange Group a "rare opportunity" to pinch business off a big rival, said Berenberg on Tuesday.
Financial Services
14,075.11
17:09 19/04/24
FTSE 100
7,895.85
16:59 19/04/24
FTSE 350
4,341.08
17:09 19/04/24
FTSE All-Share
4,296.41
17:08 19/04/24
The LSE's 43% owned CurveGlobal joint venture and ICE have both launched Sonia futures contracts in the last couple of months, in competing attempts to build liquidity ahead of the switch.
ICE currently dominates trading in sterling LIBOR futures, so Berenberg analysts said the transition to the new benchmark "creates a rare opportunity for another exchange to potentially displace ICE as the dominant trading venue in short-dated sterling futures", akin to when Deutsche Börse ‘stole’ the Bund futures contract from LIFFE in late 1998.
Sterling futures generate revenues of circa $85m a year for ICE, which Bereneberg said implyied an $850m opportunity that translates to around an 81p per share opportunity for LSE shareholders that they are likely to currently ascribing a zero probability.
LSE’s low market share in Libor futures means LSE has few revenues to cannibalise, while CurveGlobal is currently offering free trading and clearing in Sonia futures, as well as providing equity incentives to trade.
"Our investment thesis for LSE centres on the group’s superior exposure to structural growth trends (especially OTC clearing and quant investing)," the analyst wrote in a note to clients. "Nonetheless, with the market seemingly ascribing zero-value to the initiative, we believe investors receive a free option on a low probability, but reasonably high-payoff event."
Berenberg reiterated its 'buy' rating and 4,690p price target.