Transcription of Finance News Network Interview with Australian Stock Exchange CEO and Managing Director, Elmer Funke KupperDonna Sawyer: Hello I’m Donna Sawyer from the Finance News Network and joining me from the ASX is CEO and Managing Director, Elmer Funke Kupper. Elmer welcome to FNN.
Elmer Funke Kupper: Thank you.
Donna Sawyer: The ASX has recently announced its full year results with profits rising 2.7 per cent to just over $348 million. On first glance it’s a fairly flat result, but under the surface there were some interesting shifts. There was a significant difference between the first and second half for instance. What were the driving factors behind that, and how did you gauge the year’s performance overall?
Elmer Funke Kupper: Well we would call it a solid result and in fact, we did call it a solid result at our AGM today. About 70 per cent of our revenues are directly driven by market activity. In the first half of the year, activity levels were very subdued both in equities and derivatives. In the second half, they were much stronger. So in the first half our earnings were down five per cent and in the second half, they were up seven per cent. And so we’re very pleased with the second half and for the full year, that’s a solid result.
Donna Sawyer: Your derivatives segment is the ASX biggest money maker, with revenue increasing five per cent to $197 million. Do you expect that kind of growth to continue this financial year, and what about the longer term?
Elmer Funke Kupper: It’s very hard to gauge how these businesses will perform going forward, because again it depends on market conditions, investor sentiment. And in the case of derivatives, more complex matters such as the direction of interest rates, the shape of the yield curve and so forth. I’ve had a fairly good start to the year, so we did about 477,000 contracts a day in that business. That was up 16 per cent on the previous year, so that’s for the first two and a half months of this financial year. So it’s well up, but not quite as strong as the second half of last year. The second half of last year was very strong, so we need more growth in order to beat that kind of number. So a good start to the year, more growth needed.
Donna Sawyer: The next biggest contributor was listing an issue of services, whereby revenue increased five per cent to $140 million. That figure was helped by fee increases, however, these were offset by slow capital markets activity. What was behind the dip in activity and are you expecting conditions to pick up this financial year?
Elmer Funke Kupper: Yes, so we’ve seen a couple of years of somewhat slower activity. Particularly the IPO market has been weak in Australia, because the mining sector that’s been driving IPO activity has been much softer, as commodity prices have come off. So that’s one factor. The secondary market for secondary capital raising, so existing companies raising capital, has been quite strong. It was OK last year, a little bit down but not too bad. If I read the media, it suggests that there’s a stronger pipeline of IPOs coming our way. But of course, until they happen they haven’t happened. So I don’t make decisions about them, but we look forward to them happening if the things that I read are correct.
Donna Sawyer: So that leads me to my next question. What do you think it will take for confidence to return to the IPO market?
Elmer Funke Kupper: Well I think there’s a little bit of confidence returning. We’ve had a very weak year last year and I think there’s a better sentiment now. I think the Index is well up, there seems to be appetite for new investment, the election is behind us. These are all positives for that market but of course, each individual company will make their own decision and we’ll wait for them to do that. I mean so far you know, it’s been slow the start of the year, but the election is just behind us. So we look forward to a better year this year, than last year.
Donna Sawyer: ASX’s market share of on market traded value is 95 per cent, but that’s now at 92 per cent with Chi-X picking up what’s left. How do you plan to maintain market share with new players such as Chi-X, arriving on the scene?
Elmer Funke Kupper: Well obviously if you start at 100 per cent, that number is likely to come down as new competitors enter the market. We expect that, that’s happening, Chi-X is here to stay; it’s not going to go away, their market share will grow. It’s hard for me to predict where that might end up. And of course, we will do everything we can to make sure that we offer the best products and services at the right price to our clients, and that we retain as much as possible of that market share. And it’s hard to predict where that will end. But with overseas markets, these new Exchanges have reached market share of sort of 15 to 20 per cent, you know, in time. Chi-X has been public themselves that those are now ambitions that they have and you know, we’ll see where it gets to.
Donna Sawyer: The ASX successfully completed a $553 million equity raising this year, with a view to supporting its clearing operations including the newly launched over-the-counter, Australian dollar interest rate swaps. That seemed to be a key focus at the AGM here today. How is that service progressing so far in terms of demand, and what’s your outlook for OTC going forward?
Elmer Funke Kupper: Well what we’re creating here is a brand new set of services and in some ways, a brand new market. The products we’re talking about are currently traded over-the-counter. And what we’re going to do is offer services that allow them to cleared, or risk managed if you will, on the Exchange. So that’s a brand new activity for the market, creating new markets that have liquidity and counterparties in them, can take quite a bit of time. So these are low term investments for us.
We’re delivering them on time and on budget, so we launched phase one of the service within our first transaction. But it will take until the end of this financial year for all the services that we need, to be in place. So it’s a two year investment program then the service will be in place and hopefully, clients will value them and start to use them. So these are quite long term investments.
Donna Sawyer: Technology, keeping up to date and even ahead of it, seems to be a continuous battle for all Exchanges the world over, a glitch shutdown the NASDAQ for three hours last month. How does the ASX plan to stay on top of technology, to stay both open for trade and relevant in a constantly evolving environment?
Elmer Funke Kupper: This is a continuous battle for technology driven businesses, particularly in financial services. So for us that means staying on top of the latest developments, continuing to be willing to invest capital in our technical services business and our own technology. We’re doing that, our capital expenditure is up as a result. So that’s been going quite well. Now for the rest, it is continuous vigilance to make sure that whatever you create, new products that you launch and things that you do, have been well tested, well developed and well designed.
We’re not immune to these problems and you know in my first two weeks in the Exchange two years ago, we had a significant outage ourselves. I mean so far we’ve done very well since then, but that’s a statement about the past. We need to be continuously on top of this. I think the American market has an added problem in that the American market is very complicated now. It’s got many different Exchanges, many different venues lit and dark, and it’s got a very complex high speed technology environment. So the risk of things going wrong in a very sensitive complex market environment is somewhat greater, than perhaps it is here. But we’re not underestimating the challenge and we’ve got a great team of people looking after it.
Donna Sawyer: The ASX lost two very senior long serving directors last week. Shane Finemore and Russell Aboud both resigned from the Board after the US Securities and Exchange Commission imposed a fine on Manikay Partners, in relation to short selling shares in City Group. What has the ASX done or planned to do to address any negative perceptions, as a result of the events of the past week?
Elmer Funke Kupper: Well the events are the events right and so there’s not much you can do about that. So it’s all about how you manage it. And I think both the ASX Board our Chairman and its directors involved, managed this as well as they could have in the circumstances. The two directors were first and foremost concerned about the impact on the reputation of ASX, even though there were no direct governance issues in relation to our company. They decided it was in the best interests of our company to resign. So that shows that they have the best interests of the company at heart. That’s an unfortunate thing to have happened, because they were good directors who made positive contributions.
But with these events, sometimes you know, perception becomes reality. You have to deal with it; they dealt with very professionally and very well. I think our Chairman in the AGM if you read his speech, dealt with it openly directly and honestly, and quickly. I think that’s all you can do in the circumstances. So it’s an unfortunate event, it’s been well managed, it’s behind us and we look forward to appointing new directors to the Board.
Donna Sawyer: You mentioned Chairman Rick Holliday Smith said at the AGM today that there were no corporate governance issues. But he did say in hindsight, more could have been done to mitigate risk. So what are the lessons you’ve taken away from this experience?
Elmer Funke Kupper: Well what we have here, we have two directors who after they joined the Board, went in business together. And this is the business you just mentioned, Manikay Partners in New York. There’s always, you know, you pay greater attention to directors who work in the same firm. We made a very conscious decision to put one of them up for re-election this time. And the reason is that they were both very strong contributors and positive contributors, to the work that the Board is doing.
In doing that you take a risk in the sense that if something happens like this, you not only have one director affected, you have two directors affected. I think what the Chairman was trying to say is you know with the benefit of hindsight, you know you wonder if that was you know, the right call. We made the call deliberately, because they were good directors who made positive contributions. It panned out a few weeks later that an issue arose which made them resign. You know that’s life and we’ll learn our lessons from that as we make new appointments.
Donna Sawyer: Finally, what are some of the things the ASX is looking to achieve this financial year?
Elmer Funke Kupper: Well I think this financial year is about running our business well, but particularly about making the investments in the new products and services that we’re launching. So all the change in the regulatory environment globally, mean that there’re new opportunities for Exchanges to play a bigger role into how financial markets operate.
We’re making very significant investments in those new services; we usually call them post trade services. But they’re around clearing of over-the-counter derivatives; they’re around collateral management and other services. We’re uniquely placed as if we integrated exchange to deliver those services. So a big focus is on completing that investment program, while we continue to run our core business as well.
Donna Sawyer: Elmer Funke Kupper thanks for the update.
Elmer Funke Kupper: Thank you, you’re welcome.
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