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London Stock Exchange and OM to create new equity derivatives business


LONDON STOCK EXCHANGE AND OM TO CREATE NEW EQUITY DERIVATIVES BUSINESS London Stock Exchange plc and OM AB announced today that they are to develop and provide derivatives market services specifically tailored for equity market participants through the creation of a new international equity derivatives business, EDX London. EDX London will combine the strength of London Stock Exchange’s global equity market offering and expertise, with OM’s flexible technology and experience in equity derivatives. Initially, EDX London’s business will be built around the Scandinavian equity derivatives business of OM’s London subsidiary, OM London Exchange. EDX London will take responsibility for the operation of this business, expand the product range and seek to create new business lines. Part of EDX London’s initial focus will be on the development, in conjunction with London Clearing House (LCH), of an over-the-counter (OTC) equity derivatives trade confirmation and clearing service for wholesale market participants, which will provide capital and operational savings. This will reduce the cost and risk of conducting OTC business and is a facility not currently available for the growing OTC equity derivatives market in London. This service will be developed in close collaboration with the participants in this market. EDX London will join a broad trading community, comprising the existing memberships of Stockholmsbörsen, London Stock Exchange and the Scandinavian exchanges that are already linked to OM London Exchange. In addition to OM London Exchange’s 84 member firms, London Stock Exchange’s 292 member firms will be provided with access to EDX London. EDX London will use OM’s CLICK exchange technology platform together with OM’s SECUR clearing technology platform. Separately, an agreement has been reached for London Stock Exchange to use OM’s CLICK to enhance the growth of its recently launched covered warrants market by providing additional IT systems flexibility and scalability. EDX London will immediately be included in OM’s global community of technology customers (which includes American Stock Exchange, Athens Derivatives Exchange, the Australian Stock Exchange, Borsa Italiana, Hong Kong Exchanges and Clearing, International Securities Exchange in New York, and the SFE Corporation in Sydney), and aims to build business relationships and exploit synergies with members of that community. In due course, EDX London will seek to build on the order-book sharing arrangements which OM London Exchange already has in place, in co-operation with a number of other markets. From the outset, the network will consist of EDX London and Stockholmsbörsen, Oslo Börs and Copenhagen Stock Exchange, members of the NOREX Alliance. Welcoming the new initiative, Clara Furse, Chief Executive of London Stock Exchange, said: This initiative with OM represents an important business opportunity for the Exchange. In collaboration with OM and LCH, we will be providing the growing equity derivatives markets in London with new products and services, which will reduce risk and cost. We are pleased to be associated with OM’s highly-regarded derivatives technology and expertise, and look forward to being able to develop an international equity derivatives market around their network of clients. Per E. Larsson, President and CEO of OM, added: The formation of EDX London together with London Stock Exchange, Europe’s leading equity exchange, creates an exciting opportunity for OM. EDX London underpins our shared vision of further expanding a network of markets on a common technology platform, providing key synergies to customers as well as exchange partners. EDX London will pay OM a consideration of £24 million for the transfer of the equity derivatives business of OM London Exchange. London Stock Exchange will hold a 76 per cent controlling stake in the new company with OM holding a 24 per cent strategic interest, underlining its commitment to the success of the business. The earnings effect following the creation of EDX London is expected to be broadly earnings neutral, in operating terms for both parties. Subject to approval as a Recognised Investment Exchange by the Financial Services Authority, EDX London intends to begin trading in the second quarter of 2003. For more information, please contact: London Stock Exchange John Wallace - Media +44 (0)20 7797 1222 Paul Froud - Investor Relations +44 (0)20 7797 3322 Ruth Anagnos - Investor Relations +44 (0)20 7797 3322 Finsbury James Murgatroyd +44 (0)20 7251 3801 Cazenove Christopher Smith +44 (0)20 7457 3304 OM Anna Eriksson - Media +46 70 554 52 06 Jakob Håkanson - Investor Relations +46 8 405 60 42 Gavin Anderson Howard Lee +44 (0)20 7554 1401 Chris Salt +44 (0)20 7554 1464 Lenner & Partners Lars Lenner +46 8 54 50 61 10 London Stock Exchange and OM to Create New Equity Derivatives Business Introduction London Stock Exchange plc and OM AB announce the formation of EDX London, a jointly-owned business for the development of a London-based international equity derivatives business. London Stock Exchange will have a 76 per cent shareholding and OM 24 per cent. EDX London will acquire the existing Scandinavian equity derivatives exchange business owned and operated by OM London Exchange, a subsidiary of OM. EDX London will use technology provided by OM, principally CLICK for derivatives trading and SECUR for clearing. It is intended that all contracts traded on EDX London will, as soon as practicable, be cleared through London Clearing House. Subject to approval as a Recognised Investment Exchange by the Financial Services Authority, EDX London intends to begin trading in the second quarter of 2003. EDX London - the market opportunity EDX London plans to develop a service specifically for the trade confirmation and clearing of sufficiently standardised equity derivatives transacted over-the-counter (OTC) between wholesale market participants. Such a facility is not currently available for OTC equity derivatives business in London, and discussions with LCH on its delivery are already in progress. The OTC service will provide significant efficiencies for market participants, including capital and operational savings. EDX London will build this service in very close collaboration with the OTC market participants, many of whom are members of LCH. EDX London will also build on the trading of Scandinavian derivatives products currently transacted through OM London Exchange. In the longer term, London Stock Exchange and OM see opportunities to increase trading through EDX London in a broader range of order book traded equity derivatives and to provide for operational synergies between cash and derivatives markets. London Stock Exchange member firms will be offered membership of EDX London, adding to OM London Exchange’s customer base, and introducing more choice to firms whose business has hitherto been cash market focused. OM London Exchange, Stockholmsbörsen, Copenhagen Stock Exchange and Oslo Börs have established a linked distribution network operated on CLICK - Linked Exchange Clearing (LEC). EDX London aims to expand the LEC concept further to reach a broader range of customers through other collaborating exchanges. Separately, an agreement has also been reached for London Stock Exchange to adopt CLICK for the future growth of its recently introduced market in covered warrants. Description of OM London Exchange OM London Exchange, a subsidiary of OM, was established in 1989 and is a UK Recognised Investment Exchange offering exchange services and clearing of Scandinavian equity derivatives. The trading volume has continuously grown since the start. Through the link with the Scandinavian exchanges OM London Exchange is currently transacting some 25 per cent of all exchange traded Swedish derivatives. OM London Exchange also owns and operates UK Power Exchange (UKPX) and operates Pulpex (a commodity market). These markets will continue to be operated by OM, and will not be included in the formation of EDX London. OM London Exchange has 84 member firms and the daily trading volumes at OM London Exchange amount to 60,000 contracts. Between 1996 and 2002, estimated CAGR volume growth at OM London Exchange has been 29 per cent per annum. % of contract volume (2002 to date) Single equity options and futures on approximately 70 Scandinavian stocks 55 Equity index futures and options on the OMX Index, Oslo Bors Index and Copenhagen Futures Index 45 OM London Exchange offers trading and clearing services. A real time clearing link exists with Stockholmsbörsen, Oslo Börs and the Copenhagen Stock Exchange. There are 48 Direct and General Clearing Members of OM London Exchange. Clearing is delivered through OM's SECUR system. Financial information London Stock Exchange and OM will establish EDX London with London Stock Exchange holding 76 per cent and OM 24 per cent respectively of the voting and equity share capital. At completion, EDX London will make a payment in cash of £24 million to OM as consideration for the transfer of OM London Exchange’s derivatives business. Revenues and operating profit for the Scandinavian derivatives business during 2001 and for the first nine months of 2002 have been as follows: Nine months ended 30th September 2002 Year ended 31st December 2001 £ million £ million Revenues 5.6 10.6 Operating profit 0.8 2.9 Notes (i): The above financial information has been extracted from the management accounts of OM London Exchange. (ii): The earnings effect following the creation of EDX London is expected to be broadly earnings neutral, in operating terms, for both parties. (iii): Revenues include estimated contributions of £1.0 million and £2.2 million respectively from activities related to management of collateral. Income from these activities is likely to reduce when clearing of trades is transferred to LCH. (iv): For further financial information on OM, see separate OM press release issued today. Board and Management EDX London will be managed by Marc Bailey, London Stock Exchange’s Director of Business Development, and will have a board of ten directors. Two will be independent, two appointed by OM and six by London Stock Exchange. Approximately 30 existing employees of OM London Exchange are expected to transfer to EDX London at completion. Conditions, Regulatory consents and timing Completion of the agreements for establishing EDX London is conditional on: 1. the Financial Services Authority's approval of EDX London as a Recognised Investment Exchange for the purposes of the Financial Services and Markets Act 2000; 2. Office of Fair Trading clearances; and 3. certain OM London Exchange members moving to EDX London. The conditions to completion must be met no later than 1 July 2003. Advisors London Stock Exchange has been advised by Cazenove & Co. Ltd. and OM by Lenner & Partners Corporate Finance AB. 09 December 2002

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