IntercontinentalExchange is on the cusp of completing its purchase of the venerable New York Stock Exchange in a deal that will turn the Atlanta company known as ICE into an even bigger player in global finance.
But a deal last week by ICE’s acquisition target, NYSE Euronext, could raise the combined firm’s profile — and its importance to consumers and the business world — even higher.
NYSE Euronext has been named as the adminstrator of a controversial financial benchmark known as Libor that helps set prices for many key financial products, including U.S. mortgage rates.
That benchmark was at the center of a scandal involving bid-rigging by some of the world’s most powerful banks, which has led to billions of dollars in fines against several financial institutions.
A NYSE Euronext subsidiary will have significant responsibility in returning credibility to the London-based benchmark that is critical the functioning of global commerce, said Adrian Cronje, chief investment officer at Buckhead-based investment advisory Balentine. If the merger goes through, that responsibility will flow to ICE.
“There’s unquestionably prestige and bragging rights,” Cronje said, adding it is not likely to be a major revenue boost.
ICE is a 13-year-old company headquartered in Sandy Springs that has made a name for itself as both a profitable operator of electronic trading exchanges, and as a company that gobbles up competitors or tries to break up the corporate marriages of rivals.
ICE teamed with the parent of the NASDAQ stock exchange a few years ago in a hostile bid for the New York exchange and its European operations. That deal fell through, as did ICE’s attempt several years ago to pry the Chicago Board of Trade from the Chicago Mercantile Exchange.
The marriage of ICE and NYSE Euronext, which is still pending various approvals, is expected to create one of the world’s most powerful operators of exchanges for not only stocks but other financial products like futures and derivatives.
Though not well understood by many in the general public, futures help determine the prices consumers and businesses pay for products like groceries and gasoline.
Businesses use futures and other derivatives to hedge against adverse commodity or financial-market movements, and to lessen the impact of swings in prices of products such as oil or swings in interest rates. The contracts globally are valued at hundreds of trillions of dollars.
Derivatives made up of bundled mortgage securities helped tank the economy in 2008, but derivatives are commonly and safely used in other sectors.
Derivatives also are among the products that uses Libor as its benchmark for pricing.
ICE makes its money off the volume of trades on its various networks. Because the value of assets like derivatives are tied to Libor, ICE’s business relies on the credibility of that benchmark rate, Cronje said.
“They will have an important voice to restore credibility to a benchmark that is the underpinning of their business model,” he said.
Libor, or the London Interbank Offered Rate, was created in the 1980s by the British Bankers’ Association.
Powerful banks set Libor by estimating the interest rate they would charge one another for short-term loans. But the BBA and regulators failed to stop major institutions from rigging the rate, which banks did for their own profit.
Probes have led to more than $2.5 billion in fines against Royal Bank of Scotland, UBS and Barclay’s. Investigations are ongoing.
Last year, British officials recommended putting Libor under a regulated third party.
Under the contract, Libor will be transferred to a company called NYSE Euronext Rate Administration Ltd. The New York Times said the NYSE Euronext is paying a contract fee of one British pound.
“We recognize the importance of restoring confidence in this global benchmark,” ICE spokeswoman Kelly Loeffler said in an e-mail. “As the regulated venue for price discovery in Libor futures, we believe NYSE Euronext Rate Administration Limited is best placed to administer the Libor rate with regulatory oversight.”
ICE and NYSE Euronext announced their plan to join forces in December, and the $8.2 billion tie-up is expected to be complete before the end of this year, and possibly by the end of October. European regulators recently approved the deal.
So far, much of the attention on the ICE-NYSE deal has focused on its would-be ownership of the Big Board and its who’s who roster of corporate stock listings – including Atlanta’s Coca-Cola, Home Depot and Delta Air Lines.
The crown jewel, however, is NYSE’s Liffe business. Liffe is the computerized trading mechanisms for futures and financial derivatives traded by keystrokes from every corner of the globe.
And a big component of that business is interest-rate futures in Europe.
Now, NYSE Euronext will come with the best known interest rate benchmark of them all: Libor.