Latin American Capital Markets

190 RUBEN LEEpossible impact on combined revenues as a result of the merger, of approximately£50 million a year, commencing on January 1,2002.These savings would come in partfrom a reduction in the complexity of information technology operations for iX.Following much criticism of the merger proposal, and also an unanticipatedhostile bid for the LSE by the ON Group, which operated the Swedish exchanges,the proposed merger was abandoned. Among the criticisms of the merger were thefollowing:• It was not cost-efficient• The distinction between iX (for Europe's top companies) and the iX-NASDAQ joint venture (for pan-European high-growth companies) wouldlead to conflict.• Management's valuation of the LSE implied in the iX proposal was thoughtto be too low.• It had an unworkable split regulatory regime.• The merger was dictated by political compromise at the market level ratherthan economic interests.• The merger was not sensitive to national politics.Central Counterparty ClearingThe key role of a central counterparty (CCP) in clearing is to minimize the creditand market risk faced by market participants when settling their transactions. 43 Itcan do this in two main ways: by the process of novation, namely by placing itself asan intermediate counterpart between all buyers and sellers and acting to guaranteetrades, and by providing a netting system, so as to reduce the total number of financialobligations requiring settlement, thereby further minimizing risk These two functionsmay lead to various other benefits, including the preservation of market participants'anonymity; the reduction in collateral that market participants need to supporttheir trading activity, which in turn allows them to take larger positions, possibly increasingthe liquidity of the market; the simplification of risk management; the standardizationof processing and operational procedures, thus lowering costs; and a reductionin systemic risk. Of course, establishing and operating a CCP also have a rangeof associated costs.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub43 See, for example, DTCC (2000) and Scott-Quinn and Walmsley (1999). Hobson (2000) provides a good discussionof the costs and benefits of merging CCPs and CSDs.