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Recent Feature - Theodor Weimer in an interview in "Handelsblatt"

14 Nov 2018

Recent Feature - Theodor Weimer in an interview in "Handelsblatt"

During your career you have worked for McKinsey, Goldman Sachs and Hypo-Vereinsbank, among others. How big is the change for you to run a stock exchange operator now?

Theodor Weimer, CEO, Deutsche Börse AG

Every company had its own appeal. What catches my eye here is that Deutsche Börse is like a rough diamond that can be brought even further forward by grinding and polishing. With a market value of more than 20 billion euros, we are the largest stock exchange in Europe, highly profitable and technologically leading, and we are in the DAX. Nevertheless, it sometimes feels like being a medium-sized company and "hidden champion", because we only have around 5,000 employees. But these employees burn for the stock market business and do a great job. I am inspired by the business.

Last year the rough diamond produced many negative headlines. First, the merger with the London Stock Exchange (LSE) burst. Then CEO Carsten Kengeter, against whom the public prosecutor's office is investigating on suspicion of insider trading, resigned early.

When I arrived here, the company was in a state of great uncertainty. It had been claimed that Deutsche Börse had no chance of survival without a merger with the London Stock Exchange. My biggest goal for my first year was to refute that. And we have succeeded so far. We are well on our way - even without a major transaction. In the first nine months, sales increased by more than ten percent and profits by more than 15 percent.

Only a few weeks after taking office, you abolished the extended Executive Board of Deutsche Börse and put several high-ranking managers outside the door. Did Deutsche Börse need someone to take action?

The Chairman of the Supervisory Board told me in our first interview that he was looking for someone who was strong in strategy and management. The team needed trust after the failed merger. They needed someone at the top who could tell them where they were going. As CEO, you get paid to set the direction and then manage accordingly. You have to put together a good team. And you have to make changes where things don't work.

When you talk to employees, you sometimes get the impression that your appearance was a culture shock for Deutsche Börse.

That's a good thing, isn't it? When you run a business with a profit margin of around 50 percent, there is always the latent danger of leaning back. That's why I told my employees from day one: We have to run so that we can defend and expand our position. Competition is tough. You can't win without effort. Is that a culture shock? I think the biggest culture shock in this company, in my view, was caused by CEO Werner Seifert in the 1990s. He turned a classic stock exchange into an electronic trading platform. What I have been changing here since the beginning of the year is almost harmless.

They have announced the reduction of 350 jobs. Doesn't that create additional uncertainty?

It always hurts to cut jobs. In the end, it could even be a little more than 350 worldwide. But we will cut jobs in a socially responsible way. And I am grateful that we have the reconciliation of interests in place for Germany. However, it is our task to ensure that we are well equipped for the future in terms of the qualification profile of our employees.

How does the staff reduction fit in with your growth plans?

That fits together, because we are building up personnel in other areas. We are growing our turnover at double-digit rates a year and from the beginning of January to mid-October alone we gave the go-ahead for the recruitment of 720 new employees. 450 of them are already working for us today, the rest will start in the coming months. The bottom line is that our workforce is growing significantly. And we will hire numerous new employees next year as well.

Since the beginning of the year, the Deutsche Börse share has risen by around 15 percent to 111 euros. How much room for improvement is there left?

The share price performed so well above all because we presented good figures. Even more important, however, is that we have managed to catch up with the competition in terms of valuation. Despite a 25 percent rise in the share price over the past 12 months, the majority of analysts continue to recommend our share as a buy. That pleases us.

With your ambition, it must be your goal to create a new all-time high.

Yes, only a few would have anything against a new all-time high. I don't take exception to that. But that has nothing to do with ambition, but with the joy of creating. And the shareholders should expect that from a CEO, I think. But the markets must also play their part.

As part of your strategy, they want to focus on acquisitions in addition to organic growth and new technologies. What are your concrete plans?

We are playing in the Champions League in the stock market business - and that is where we want to stay. The gap between us and the most valuable stock exchange operators CME and ICE from the USA must not become too big. After all, size is a decisive factor in our business. Organic growth will not be enough. ICE and CME have both grown strongly through acquisitions - and are continuing their search for takeover targets. I also spend a lot of time looking at potential transactions.

So far, with the Swisscanto fund platform and the GTX foreign exchange trading platform, you have only made two smaller takeovers, each for just under EUR 100 million. Will there also be a larger transaction in the foreseeable future?

There is no reason to rush into anything, because many takeover targets are currently very expensive. But you are right: the two transactions that we have carried out so far do not make the big difference in the end, but are nice additions to existing transactions. This is not yet a breakthrough when it comes to acquisitions. Yes, we need larger deals that will take us further forward. The competition does not sleep and is aggressive.

Has the supervisory board set you a limit on how much you can spend on takeovers?

My supervisory board gives the management board a free hand on the subject and would also appreciate larger takeovers. But we have to be able to demonstrate that a big deal makes strategic sense and that we can afford it. We don't have any cowboys on the Supervisory Board. Basically, we have defined five areas in which we would like to make acquisitions: data business, trading in currencies and commodities, fund service business and bond trading.

Deutsche Börse did not enter currency trading until 2015 with the acquisition of the Frankfurt 360T currency trading platform. Why?

It is a strategically attractive business with very good growth prospects. My predecessor made a good decision here. Through the acquisition of GTX, we have further strengthened this area. But if we could add something, that would be great.

There are currently two major takeover candidates that would fit into your baggage scheme: The currency trading platform FXAll and the bond platform Tradeweb. However, the companies would each cost at least three billion dollars.

We can handle transactions of up to 1.5 billion euros from our own resources without jeopardizing the rating of our subsidiary Clearstream. But if necessary, we could also obtain additional equity on the market for a major acquisition.

Your predecessor also negotiated a combination with the index provider MSCI. How realistic do you think that is?

There are many beautiful combinations that are theoretically conceivable. But you also have to be able to afford a deal. MSCI is worth ten billion euros and has a particularly high price-earnings ratio. There is a risk of dilution in such transactions. You have to make a clear distinction between dream and reality, i.e. feasibility.

You were in Silicon Valley recently. Did you also look at takeover candidates there?

No. The trip at the beginning of October had nothing to do with takeovers. With the Executive Board and our technology experts, we visited companies that are active in areas in which we intend to invest more in the coming years and with which we want to partner. The areas are Artificial Intelligence, Cloud, Big Data and Blockchain.

When and how will Deutsche Börse use Blockchain technology?

For us, the blockchain is both a threat and an opportunity. We are an intermediary that mediates between banks, asset managers and other market participants. And the idea of the blockchain is basically to make intermediaries like us superfluous and to eliminate them. I don't believe in a quick application of the blockchain in trading. Every day between 120 and 130 million transactions run through us. If you wanted to make a public blockchain through our systems, the energy requirement would be greater than that of a medium-sized country.  On the other hand, the business potential from the blockchain is considerable.

What about the processing of transactions?

In post-trading, the blockchain can help us to become faster. When you trade with us, your order is executed in thousandths of a second. But it takes two days until the transaction is completed and the security lands in your custody account. So there's still air up there.

The topic of crypto currencies and cryptoassets is also being intensively discussed in the USA. Their competitors CME and CBOE have already entered the business and offer futures on Bitcoins and other crypto currencies.

We have deliberately kept our hands off trading in crypto currencies so far, because a large part of these transactions takes place completely in the unregulated area. Crypto currencies were created to create money substitution cycles that can hardly be controlled outside the ledger of the parties involved. In the case of cryptoassets, more precisely the tokenisation of assets, I see great potential for our company.

What does this mean?

With tokens, you can not only digitally invest in companies, but also in real estate, pictures or a person's workforce. A gigantic market is emerging here.

How does Deutsche Börse intend to get involved in this business?

We are taking a close look at this topic and will certainly become active there. However, I don't think we should build a trading platform for tokens on our own. This is only possible through partnerships and investments in companies that specialize in this area.

That was the view into the future. But what about your existing systems? In March and October there were major breakdowns on the Frankfurt Stock Exchange, which delayed the start of trading by just under an hour in each case.

A stock exchange boss hates it like the plague when there are network problems or software problems. The reason for the delay in March was that several trading applications of a customer were logged on to the system almost simultaneously, resulting in a blockade for all customers when they logged on. The standard with us is that we shut down the system or don't boot it at all if there are complications or something is not safe. Such incidents are unpleasant, but not really worrisome. What really worries me is that there are massive cyber attacks on all the company's systems, including ours.

How do you arm yourself against this?

We will hire 50 new people in the IT security sector next year alone.

Where do the attacks come from? From Russia?

That can't always be pinpointed precisely. Absolute professionals are at work here.

Were the attackers successful?

So far we have been able to fend off all attacks. But there is never 100 percent security. And we know: If something fundamental were to happen, it would quickly become a major problem for us. Because our capital is the trust of market participants in us and our systems.

What do you mean by that?

Stock exchange operators, clearing houses and central securities depositories were stable in the financial crisis 10 years ago. In contrast to the banks, nobody had to inject money into our system. That's why the regulators say: You ensure stability. And that's why the regulators are forcing banks and investors to conduct more and more transactions via stock exchanges. That helps us.  Deutsche Börse is a "crisis winner".

Deutsche Börse now has another great opportunity when it comes to settling derivative transactions in euros, the so-called euro clearing. Because in the course of the break-out, parts of the clearing business may have to be transferred from its London competitor LCH to the EU. What are your opportunities?

Within the largest derivatives market in the world - the interest rate derivatives clearing business will be redistributed in the course of the Brexit. We have now increased our market share in euro-denominated business from one to ten percent. By the year after next we want to reach 25 percent. I do not believe that the clearing business will be completely transferred from LCH to us. But I assume that in the end there will be two competitive providers in Europe.

You recently warned that the British authorities could use "unfair means" to defend London as a financial centre. And you are also less careful verbally with Great Britain than your predecessor Carsten Kengeter. Are you deliberately setting other accents here?

The situation of my predecessor, who wanted to merge with the London Stock Exchange, cannot be compared with that of today. The world has changed. Politically, I think the Brexit is a catastrophe. It will weaken not only Britain, but the whole of Europe. But as an entrepreneur, I get paid to react to new conditions - and to do so quickly. I cannot say timidly that I will take a look at what will happen to the British. I have to take the initiative and act.

How are you going to dispel the reservations of the big banks that would like to continue doing most of their business in London?

The bosses of the big banks told us: We only change if you can offer us the same conditions as in London. We've managed that now - thanks to our partnership programme. It provides for the ten most active customers to participate in the economic success of our subsidiary Eurex Clearing. We didn't wait for the politicians or the regulators, but offered a market-based solution to make a move from London to Frankfurt appealing to the banks.

How will Brexit affect the financial markets?

The architecture of financial markets will be shifted to the EU-27 - because liability and supervision must not fall apart. The EU must also make it clear that a country cannot simply continue as if nothing had happened once it leaves the Union. Otherwise, the hurdles to leaving the EU would also be low for all other countries. But in my view there will be fewer changes in the financial sector than in the real economy. Because our industry is digital per se - we do not have to physically transport goods across the Channel.

Does that mean they don't expect a big wave of moves?

No. The people who are successful in London in investment banking and in investment companies will not simply move their families because of the brexit. I've been around this community for a long time and know it well. Most senior financial managers will continue to work from the UK. The big investors will also stay in London. There won't be an exodus. I assume that in a first wave a maximum of 5000 people will leave the City of London - maybe 1000 to 1500 of them to Frankfurt. There will not be a mass migration of bankers from London to Frankfurt - as nice as that would be for the financial centre.

Is the German government committed enough to strengthening Germany as a financial centre in the course of the Brexit?

We feel well supported - both in Hesse and in Berlin. Politicians and regulators appreciate the fact that we have run off with our partnership programme. And now they have to provide appropriate framework conditions and make sure that no one is going to dig us in from behind. Because one thing is clear: the fish has not yet been cleaned - as the saying goes. In the course of the brexit there are still many unresolved questions. And in the financial market, questions of detail can have a big impact in the end.

What is the relationship between politics and the financial sector ten years after the outbreak of the financial crisis?

Many politicians have not forgotten the financial crisis - and that is a good thing. But in the meantime we can again talk very unemotionally with politicians about important issues. The German government is well aware that the real economy cannot really develop without the support of the financial sector. And that is why it rightly wants to strengthen Germany as a financial centre.

In your opinion, is it a good sign that Friedrich Merz is applying for the CDU chairmanship and then possibly also for the chancellery, someone who knows his way around the financial sector very well?

In a globally networked world, economic policy competence in politics is a necessary prerequisite. Experience in finance always helps. By the way, this competence is also given in the current government. Economic policy issues are highly relevant - from the USA to China. We are the fourth largest economy in the world. We cannot pretend that we can move forward without economic competence. Fortunately, no one does.

Convenience translation of the German article; first published in the Handelsblatt, 14 November 2018
© Handelsblatt GmbH. All rights reserved.

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