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Cboe Global Markets, Inc. CBOE has acquired leading pan-European equities clearing house, EuroCCP. In December 2019, it had inked the deal to purchase 80% stake in EuroCCP.
Founded in 2007, Amsterdam-based European Central Counterparty N.V. (EuroCCP) is Europe’s leading cash equities CCP. It provides clearing members with easy access and ability to maximize operational efficiency and netting opportunities across more than 30 stock exchanges, multilateral trading facilities and trade sources in Europe. These services entail lower risks. It clears equities from 18 European markets and the United States, Depositary Receipts along with ETFs and Currency ETCs.
On average, EuroCCP clears 4 to 5 million trades daily for 39 trading venues, representing almost 95% of the European equities market.
Cboe Global had 20% stake in EuroCCP.
Rationale Behind the Deal
The acquisition is expected to boost the European equities business of Cboe Global as well as leverage the strength of its pan-European network, and pursue the development of derivatives trading and clearing capabilities in the European equities business e region. These in turn should help the company grow its European equities business. Addition of EuroCCP should also help diversify its business into trading and clearing derivatives in the region.
Furthermore, this acquisition makes way for the introduction of Cboe Europe Derivatives in the first half of 2021, pending regulatory approvals.It is a new Amsterdam-based futures and options market, which is supposed to offer trading in equity futures and options based on six Cboe Europe Indices.
The launch of pan-European market will boost the existing European derivatives market structure and will assist the market participants to access a modern derivatives market through a single access point.
On the other hand EuroCCP will boost its derivatives clearing services and will develop its product offering across asset classes.
Also, per the transaction, EuroCCP has set up a credit facility of up to €1.5 billion in order to reinforce the liquidity risk management framework. It will also enable EuroCCP to meet liquidity requirements under the European Market Infrastructure Regulation (EMIR).
Coming back to Cboe, one of the largest stock exchange operators by volume in the United States and a leading market globally for ETP trading, has reiterated its formerly disclosed earnings per share impact related to the buyout of EuroCCP and its investment to build out pan-European derivatives trading and clearing, which are expected to drag earnings per share by about 8 cents to 10 cents in 2020 and 2021.
But the company anticipates the impact to be at the higher end of the range, which indicates higher than originally estimated facility fees associated with EuroCCP’s new €1.5 billion backup line of credit.
Cboe Global offers trading across a wide range of products in multiple asset classes and geographies, which includes options, futures, U.S. and European equities among others. The European Equities segment covers securities from 18 European markets, which include transaction services on listed equities, ETPs, and exchange-traded commodities.
In European-listed equities, Cboe Global is one of the largest pan-European exchange operators, with a market share of 20.2% of European trading in the securities available for trading on Cboe Europe Equities in 2019.
In the first quarter of 2020, revenues in the European Equities segment increased 8.6% to $32.9 million.
Inorganic Growth Story
Cboe Global boasts a compelling inorganic growth story given its prudent acquisitions. The acquisition of Bats Global in February 2017 expands and diversifies CBOE Global Markets’ product portfolio with the addition of U.S. and European cash equities, Global ETPs and Global FX. Thereafter in November 2017, Cboe Global Markets purchased the assets of Silexx Financial Systems to boost its service portfolio. Recently, Cboe Global acquired Trade Alert to provide real-time data, market information and alerts to customers while agreed to buy MATCHNow from Virtu Financial VIRT to venture into Canadian market.
Apart from gaining competitive edge by diversifying as well as adding capabilities, strategic acquisitions diversify Cboe Global’s business mix as well as help in achieving expense synergies.
Shares of this Zacks Rank #3 (Hold) stock exchange operator have underperformed the industry in the past year. The stock has lost 14% against the industry’s increase of 0.7%. Nevertheless, its diversified product portfolio and strong liquidity position should drive the stock going forward.
Stocks to Consider
Some better-ranked stocks from the same industry include MarketAxess Holdings Inc MKTX and Deutsche Boerse AG DBOEY, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MarketAxess operates an electronic trading platform that enables fixed-income market participants to trade corporate bonds and other types of fixed-income instruments worldwide. It surpassed estimates in three of the last four quarters, with the average positive surprise being 1.09%.
Deutsche Boerse operates as an exchange organization in Europe, the United States, and the Asia-Pacific and engages in electronic trading of derivatives, foreign exchange, operating Eurex Repo over the counter trading platform and electronic clearing architecture. It came up with four-quarter average positive surprise of 15.38%.
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