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12:23 PM
Robert Sales
Robert Sales
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A Conversation with Hugh Freedberg

WS&T Senior Editor Robert Sales breaks bread with Liffe CEO Hugh Freedberg.

Facing increased competitive pressure from the likes of all-electronic rivals like Eurex, the London International Financial Futures and Options Exchange (Liffe) has spent the past three years transforming itself. Most recently, following its monumental decisions to demutualize and eliminate its floor, Liffe received shareholder approval for its plan to completely split its technology business from its exchange business. Moreover, as part of its separation scheme, Liffe has formed a series of alliances, unveiling its intention aggressively sell its technology and market expertise to up-and-coming B2B exchanges. To get the low-down on all of these developments, WS&T Senior Editor Robert Sales recently broke bread with Liffe CEO Hugh Freedberg.

WS&T: In late November, Liffe received shareholder approval to separate its technology business from its exchange business. When do you plan to go live with your technology subsidiary, do you have a name for it and have you decided how you will staff this new entity?

Freedberg: The way in which it's going to work is that we will have a technology business and an exchange business, and they will be, initially, two separate business divisions. ... A variety of factors will dictate exactly when the technology division becomes a wholly owned subsidiary of the Liffe Holdings Co. We still have to finalize a date for that .... Basically, the sorts of businesses we are pursuing, and where we've got the majority of our interests, are people who want to basically have their own futures exchange capability-meaning they've either got it already or they want to develop it. And they're looking for us to provide them with more than just a piece of trading technology. They're looking for us to be able to help them transition from floor to screen, or they're looking for us to give them the markets expertise in terms of product development, running a market, technology and regulation. It's a rounded package of services that combines skills from both our exchange division and our technology division.

WS&T: That's interesting. But do you have a name for the new entity and have you decided how you're going to staff it?

Freedberg: We have not yet decided on a name .... For the short term, just internally, we're calling it Liffe Technology. We have yet to brand the entity .... In terms of staffing, we've got a current complement of staff who are Liffe Technology employees, and they will obviously become the core of Liffe Technology. And then, of course, because we're seeking to commercialize the Liffe technology business to be more than just a provider of technology to Liffe, we will add to that team of people by hiring the appropriate resources we need-either at a senior management level or a technical level.

WS&T: As part of your decision to separate your technology business from your exchange, you've formed alliances with a variety of firms-including Battery Ventures, the Blackstone Group and Cap Gemini Ernst & Young. Can you explain why you have formed these alliances and specify the role that each of these partners will play in your future?

Freedberg: Cap Gemini Ernst & Young was selected as our global technology partner, because for us to be able to develop and run Liffe's technology for Liffe the exchange is one thing. For us to be able to take our technology capability and commercialize it to be able to provide it to third parties is another. That's something that's well within the experience and capabilities of someone like Cap Gemini .... So they will be working with us as our partners to help us commercialize our technology offering, and to help develop it, market it and install it, where appropriate.

As far as Battery and Blackstone are concerned ... the thing that they are seeking to do it is utilize the Liffe exchange and technology capabilities ... by applying them to the developing futures markets in the B2B area. So, all of these spot markets are going to, at some stage, want to develop a futures capability. And Battery and Blackstone are of the view that that futures capability is potentially well provided by Liffe, because of the fact that we've demutualized, we're wholly electronic, have global distribution and have a trading engine that can do complex derivatives trading .... Their role will be to help us on the strategic business development side, given the fact that both of them are involved in technology businesses in the U.S. Battery is one of the top three investors, from a venture capital point of view, in the B2B area. And Blackstone, of course, are very substantial investors in medium to large B2B companies, and they've just recently raised a very large technology fund.

WS&T: As part of the alliance with Battery and Blackstone, those firms have agreed to invest roughly British Sterling 40 million pounds in Liffe's parent, Liffe Holdings, in return for approximately 7.77 million shares of Liffe the exchange. How do you plan to re-invest that capital?

Freedberg: In total, we've raised 60 million pounds sterling-or roughly $100 million. Of the 60 million pounds sterling, Battery and Blackstone are committed to 40 million .... In return Battery and Blackstone ended up with, collectively, 29.3% of the exchange .... The money we've raised from Battery, Blackstone and shareholders will be used, mainly, for the development and commercialization of the Liffe Technology business-but not exclusively for that, because we're also going to be investing in building the Liffe exchange business.

WS&T: Unlike some of Liffe's potential competitors in the B2B space, Liffe has not licensed its trading engine, Liffe Connect, to many other exchanges outside of London. Do you see that as a potential stumbling block, and what will the Liffe Technology unit offer that will differentiate it from competitors in the B2B arena?

Freedberg: We believe very strongly that we can differentiate ourselves by being able to offer people technology combined with the ability to run an electronic market globally .... Many of the people who we are targeting as our potential B2B customers and who are talking to us as potential customers now are people who are looking for market exchange capability-of which technology is only a part .... If you look at other technology suppliers, they are trying to sell their technology as a standalone technology .... But what we're basically saying is that we offer a menu of solutions, of which the technology is a part. And we can either install the system for them, or they can utilize our own technology infrastructure, if they so desire.

WS&T: But do you think the fact that some of your potential exchange rivals in the B2B space have already licensed their trading engines to a host of other markets puts you at any kind of disadvantage? Liffe has some experience in selling Liffe Connect to other markets in London, but does not have a large client base to refer to when it tries to sell its technology and expertise to B2B players.

Freedberg: The thing that the other people, I don't believe, are able to offer is the derivatives trading technology that has the same level of sophistication, functionality and global distribution that Liffe Connect has. I would suggest that most of the people who currently provide technology in the so-called B2B space ... are people providing technology for spot trading-but not for complex derivatives trading .... That said, we obviously have to have a success. We have to get a run on the board or get some wins. So, yes, we do need that, but Liffe Technology is only two weeks old.

WS&T: Before Liffe ever decided to split off its technology business, it formed a strategic alliance with the CME. As I recall, there were three main components of that alliance-including a cross-margining component, a trading interface component and a joint venture component. Can you please give me an update on where you stand with each of those different components?

Freedberg: The cross-margining arrangement is now up and running and established.... It's being used by those members who wish to avail themselves of it. We also already have the cross access, or the mutual access, of their customers being able to access our products and our customers being able to access their products on the screen .... The joint venture idea we haven't yet put any substance into ... because we haven't yet identified an opportunity where it makes sense to create or launch a joint venture where we could combine our joint skills and assets. But the first two components of the alliance are up and running, and have been since about April of this year.

WS&T: When you look at the major derivatives markets landscape worldwide, you really now have two major factions: the CBOT/Eurex partnership and the CME/Euronext. Through your deal with the CME, you have leaned toward the latter alliance, but you've still kept some distance from the Merc. For example, your deal does not call for either exchange to adopt a single trading engine. But can you foresee a time, in the future, where you will merge your trading engine with the engine of these other giant markets?

Freedberg: I can give you sort of a hypothetical answer. If there is a clear-cut business case which delivers a better solution to the market, and which translates into added value to shareholders, then, yes, I can see Liffe merging its engine with another market's. But at the end of the day, the governing principals for us are: what does a merger do to our share of the market, and does it do so profitably and therefore deliver value to shareholders? And on that basis, we're able to sort of talk, in general about anything. But we are certainly very focused at the moment on using the fact that we are a demutualized, for-profit, wholly electronic exchange with global distribution and proven technology. We've got new capital and new partners, and we're going to go vigorously after what we consider to be a whole new opportunity in the derivatives industry-which is the emerging B2B markets.

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