City watchdog warns over LSE move

All change at the LSE could mean problems, the FSA says

The Financial Services Authority has warned that any plan to base the London Stock Exchange outside the UK could affect market regulation and operation.

It warned of "significant implications" and said such fears would be eased if suitors kept a merged company in the UK with its primary listing in London.

However, the FSA did say it was "indifferent" to the nationality of any future owner of the exchange.

The LSE recently rejected a bid from Germany's Deutsche Boerse.

The LSE said the German exchange operator's 530p a share bid - worth approximately £1.3bn - undervalued the company.

But the LSE has since held talks about a tie-up with Deutsche Boerse and other potential bidder Euronext, which is based in Paris.

While the pan-European bourse has not yet made a bid for LSE, reports have claimed it may enter the fray.

A deal with either bidder would create the biggest stock market operator in Europe.

Hurdles

But with both companies based outside the UK, that could cause potential problems, the FSA warned in a statement.

THE STORY SO FAR May 2001: LSE and Deutsche Boerse announce plans for pan-European bourse called iX August 2001: Sweden's OM bids for LSE, forcing it to withdraw from iX deal September 2001: LSE bids for derivatives exchange LIFFE, which is eventually bought by Euronext December 2004: Deutsche Boerse bid for LSE rejected, but door left open for more talks December 2004: Euronext says it is also interested in bidding for LSE January 2005: Deutsche Boerse sets out its bid LSE's share price Deutsche Boerse's share price Q&A: LSE takeover

Any takeover could see services "passported" to London through another EU state, it warned.

If the market is operated from overseas, the exchange would not be listed in the UK, nor would it be subject to some corporate governance rules, the FSA said.

It would leave the FSA without the primary responsibility of investigating market abuses.

Additionally, the role of the Takeover Panel and the Takeover Code would alter, "creating additional complexity in takeovers".

"It is therefore worth stakeholders raising the question of how any bidder will address these issues," the FSA said.

"There are a number of ways in which stakeholders may be reassured about the longer term durability of the arrangements including, as some have suggested, having the parent company or "topco" located in the UK with its primary listing on the LSE."

Concessions

Some market commentators have suggested the FSA's call could be seen as a veiled threat to LSE's suitors to base themselves in the UK.

Deutsche Boerse has previously said it intends to preserve the market structures of both exchanges.

However, some German observers fear any takeover could weaken Frankfurt's position as Europe's financial centre.

The group has offered a place on the board of a merged company to LSE boss, Clara Furse, and the finance director, Jonathan Howell.

But it is uncertain where the two could be based to ease political concerns that Frankfurt would lose out in a merger.

Deutsche Boerse has said its chief operating officer, chief information officer, chief financial officer and chief executive would all be based in Germany.

Meanwhile, reports suggest that Euronext - which combines the Paris, Amsterdam and Lisbon stock exchanges - has offered to move its headquarters from Paris to London.