Mates’ rates: how to get ahead in exchange work
24 October 2011 | By Joshua Freedman
30 July 2014
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25 November 2013
Stock exchange work can be a slow burner, but the mandates can be lucrative for the firms in the know, says Joshua Freedman
You can hardly get a more institutionalised client relationship than one dating back to Victorian times, but for Clifford Chance, the London Clearing House (LCH) appears to have been on its roster for more than 120 years.
When the LCH was set up on 22 February 1888, one of the witnesses to the memorandum of association was a clerk from a firm called Messrs Hollows, Son & Coward.
oward is believed to be none other than the name partner of Clifford Chance legacy firm Coward Chance, that merged with Clifford Turner in 1987.
Some 123 years later Clifford Chance partner Patrick Sarch (featured in The Lawyer’s The Hot 100 2011), is advising LCH.Clearnet, today’s realisation of the exchange that old Mr Coward put his name to in 1888, on its potential sale to the London Stock Exchange (LSE). Talk about a longstanding client.
The magic circle firm has passed LCH from relationship partner to relationship partner as if the clearing house were a Patek Philippe, with partner Lynn Johansen advising it on the establishment of CrestCo’s trade settlement system in 2002.
When LCH merged with Paris clearing house Clearnet, a deal that went live 14 years ago, corporate partner Jonny Myers led the mandate. Sarch joined Clifford Chance in 2001 and, still a few years off partnership, was called in to help.
“I was asked to go to a meeting that I was told shouldn’t last too long,” Sarch recalls. “In the end I worked on the merger for two years, until 2003.”
Clifford Chance continued to advise the merged clearing house after the deal, with Sarch, by now a partner, leading the team on the acquisition of shares in pan-European stock exchange Euronext in 2007.
Getting it together
Sarch’s most recent deal, in which the LSE beat off competition from rival bidder Markit to win the right to take over LCH.Clearnet, is the latest in a string of M&A transactions in the sector.
“There’s been a rush to consolidate among exchanges,” he says. “There’s been a huge number of potential deals among exchanges. It seems that nobody wants to be left on their own at the end of the party.”
There have been enough announced and failed deals to keep even a financial newspaper reader busy, let alone a corporate lawyer. The cause of the spate of deals dates back 25 years - roughly to so-called ’Black Monday’ on 19 October 1987, as one City partner puts it.
After this, the race to take over the exchanges world kicked off. Regional exchanges merged to form national exchanges, which then merged into pan-continental and, now, global exchanges.
Euronext came out a winner following the merger of the Amsterdam, Brussels and Paris exchanges in September 2000, a deal on which Herbert Smith alliance partner Stibbe advised. Dutch firms NautaDutilh and Kennedy Van der Laan also won work from Euronext, as did Freshfields Bruckhaus Deringer and Allen & Overy.
The European exchange’s combination with the New York Stock Exchange (NYSE) in 2007, meanwhile, gave mandates to Bredin Prat, Cleary Gottlieb Steen & Hamilton and Stibbe, which all represented Euronext opposite Wachtell Lipton Rosen & Katz.
While others have been doing deals the LSE has been relatively passive. It fought off five hostile bids and pulled out of a bid for Toronto’s TMX earlier this year. It is now pressing ahead with the LCH.Clearnet takeover.
Meanwhile, Deutsche Börse is in merger talks with NYSE, a process in which Linklaters acted for the former out of Düsseldorf and Wachtell acted for NYSE owner NYSE Euronext. Cleary was brought in by the US exchange to advise on competition issues, but, according to a City partner, has been getting a smaller slice of NYSE Euronext’s pie over time.
For Sundeep Kapila, corporate partner and global head of market infrastructure at Freshfields, longstanding adviser to the LSE, the upturn - or increase in the publicity of deals, as it may be - is no surprise. Exchanges, according to him, have outgrown their national markets and are looking overseas.
“Once they reach a degree of maturity in their home market there’s probably a limit to how much business they can get,” Kapila observes.
Freshfields is another firm to have benefited from a longstanding relationship with one of the biggest names in the industry.
“In some cases, people have had the clients for quite a long time. It’s no big secret that the LSE is one of our clients and has been for a number of years,” says Kapila.
Freshfields’ relationship with the LSE dates back to when the firm advised it on listing rules and other matters before the main spate of deals. One source says the LSE was “effectively demutualised by Freshfields”, but Herbert Smith was reported at the time as the adviser on the 2000 demutualisation.
Data from M&A intelligence service Mergermarket shows that Freshfields has advised on seven of the LSE’s successful and cancelled transactions since 1997, with Travers Smith, Orrick Herrington & Sutcliffe and Canadian firm Osler Hoskin & Harcourt gaining mandates on a deal each.
Osler advised the LSE alongside Freshfields on the failed TMX deal, while Travers won the role acting for online trading platform Turquoise when it was acquired by the LSE in 2009.
Freshfields appeared on all these deals and guided the LSE through the LCH.Clearnet bid, fielding partners Andrew Hutchings and Philip Richards, the same duo that advised on the TMX process.
But when it comes to winning work from stock exchanges it is not just about decades-old institutional relationships. The high rate of people movement among players in a bustling and entrepreneurial sector full of relatively young companies means individuals crop up all over the place, in turn allowing firms to snatch work when the right friend turns up in the right arena.
“Individuals at the exchanges and their advisory firms move around a lot,” agrees Sarch. “The same people pop up in various roles all over the place. That means it’s quite a tight-knit industry where a lot of discussions take place between parties all the time and relationships are important.”
Perhaps nobody knows this better than Charles Meek, head of corporate at Macfarlanes, a firm that has won work in the sector thanks to its credentials in mid-cap M&A, but not a player with a reputation in the crucial regulatory sphere to match the magic circle.
Meek worked on the sale of London interdealer electronic trading platform Swapstream to the Chicago Mercantile Exchange in 2005. One of his counterparts on the deal was a certain Mark Hemsley, who was acting as a consultant to a shareholder with a stake in the transaction.
Hemsley joined trading facility Bats in 2008 as chief executive of the European arm, which later became Bats Europe. When stock market operator Bats Global Markets got going with its merger with pan-European platform Chi-X, a deal that broke in late 2010 and is still awaiting competition clearance, Hemsley called up Meek and, hey presto, Macfarlanes had won a client.
The deal has also given Macfarlanes work outside the corporate sphere, with an antitrust team led by partner Marc Israel advising on the Competition Commission review.
It certainly helps that both companies in merger talks are young, small and entrepreneurial. Chi-X Europe was established in 2007 in response to the EU Markets in Financial Instruments Directive (Mifid), which aimed to break up national exchanges’ monopoly positions. Although the global Bats operation was started by 13 people in 2005, Bats Europe did not launch until a few months after Hemsley joined.
Slaughter and May also won a new client on the deal, advising Chi-X after a competition tender process, with partner Richard Smith leading on M&A matters and partner Isabel Taylor on competition.
The regulatory interface
Regulatory changes are central to the exchanges sector and kickstarted much of the consolidation activity.
“The key driver was the Mifid legislation in 2007, which was designed to promote competition between trading platforms,” comments Meek.
Factors on the regulatory-antitrust interface can make or break deals and form the crux of successful ones. As part of the NYSE-Euronext merger agreement, the two parties’ holding companies have the right to intervene if either the US or European market’s regulatory environment is thought to be having a negative effect on the business in the other location - a phenomenon known as ’regulatory creep’. Regulatory hurdles, meanwhile, were said to be key in bringing down the LSE-TMX deal.
Competition, in particular, is key. Experts say the authorities have shifted from viewing the goals in terms of market efficiency towards aiming for a situation whereby competition among platforms is fair.
“Over the relatively recent period, competition regulators have changed,” says Clifford Chance financial regulatory partner Simon Gleeson. “They’re now looking at competition among exchanges and clearing houses as well as among their users. That means you have to know the market well. Information isn’t easily available. To make decent arguments about competition among market service providers you’re making arguments about both the market and the market service providers.”
Unsurprisingly, this means mandates lend themselves to firms with strong international regulatory and competition practices, and industry knowledge.
“If you’re a plasterboard manufacturer, what you want to know is that you’re drawing on someone who knows their way around the plasterboard industry,” Gleeson remarks.
Enter Freshfields, Clifford Chance and Linklaters, three of the firms with the biggest footprints in the financial regulatory sphere and, in turn, three of the firms with the strongest records in stock exchange deals.
In the US, the market is said to be more split between firms that exchanges go to for ongoing regulatory advice - Morgan Lewis & Bockius and Kirkland & Ellis, for example - and those that pick up deals work. Indeed, the financial downturn was too much for Thacher Proffitt & Wood, one of the US market’s main firms for stock exchange mandates, which went under in late 2008 after the collapse of the structured finance and securitisation market. But in the City, the names are similar in both the regulatory and the M&A spaces.
Ashurst was also on the LCH.Clearnet bid process, acting for unsuccessful bidder and longstanding client Markit, a trade data and risk management entity, but this is said to be based on its strong corporate capabilities rather than industry focus.
“Ashurst acted for a possible bid for LCH.Clearnet, but wouldn’t be seen to have the regulatory strength to advise in the technical sector,” says one City partner.
The same could probably be said of Slaughters and Macfarlanes, both of whom have won market share thanks to their chunky corporate practices.
Old relationships and unexpected phone calls aside, firms have a tough job on their hands if they wish to break through from the start-up work for exchanges to the hefty deals. Experts say that, cross-border M&A notwithstanding, the biggest demand for legal advice comes at an exchange’s establishment stage.
“Once they’re set up, there shouldn’t be that much of a requirement for a lot of legal advice; the complex thing is the establishment,” says Kapila, who advised on the setting up of electronic bond trading platform BondClick in 1997 and the Settlement and Operations Clearing Exchange, or Socx, in 2001.
As exchanges are often set up by investment banks, with other banks joining the fray at a later stage in the establishment process, firms with these relationships have a head start. Freshfields won the BondClick mandate thanks to longstanding ties with banks including Deutsche Bank and JP Morgan, part of the consortium that approached the magic circle firm.
But after the launch firms have to persevere before the mandates flow in and must wait until the exchange shifts from being a fledgling entity set up by a banking syndicate to a meaty client capable, like Bats Europe, of picking up the phone and asking a lawyer to work on a deal.
“The dividing line between the exchange and the banks isn’t that clear,” says one corporate partner with knowledge of the sector. “There’ll come a point when the exchange flies the nest. That’s when a decision is made [about legal advisers]. There’s a long gestation period before it’s a fully-functioning being that needs its own legal adviser.”
For law firms eyeing work in the exchanges sector the trick, then, is to have a bit of patience and wait before those relationships solidify. Hopefully not 123 years, mind.
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