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Regulation Could Weigh on Buoyant Markit

Regulation Could Weigh on Buoyant Markit

PAUL J. DAVIES

June 19, 2014 3:15 p.m. ET

When a group of well-informed insiders decide to sell, it pays to be careful about what is on offer. This is doubly true when those insiders are running the sale process.

So it is with Markit Group, the financial data and services firm whose stock debuted in New York Thursday. Most of the shares sold came from investment banks that not only owned almost half the company, but are among its key customers and suppliers.

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Markit was a smart idea in a different time. It was set up to provide much-needed transparency to a world of over-the-counter derivatives and securities trading. Since the financial crisis, though, much of that world is being forced into the light of centralized clearing, trade reporting and even futures exchanges. About 44% of all over-the-counter derivatives, or swaps, were being centrally cleared by the end of 2012, up from just over one-tenth in 2007, according to Aite, an independent group.

That has kept rising, according to the Financial Stability Board, much of it driven by interest-rate swaps, which are less important for Markit’s business. However, almost 20% of credit-default swaps are now centrally cleared, up from 8% in 2010. More could migrate to central clearing.

This could have a big effect on Markit’s pricing and information services, which make up about half its revenue. Centralized clearing also could hit trade processing, which makes up another 28% of sales.

So far, though, Markit has done well out of the regulatory changes. Banks and investors still want to use Markit’s data to sanity-check the pricing clearing houses supply. In processing, too, as more trade goes electronic, much of the hard work of settling trades is more easily handled. But regulatory demands for intraday portfolio reconciliation create new requirements companies like Markit can help meet.

The next few years will see over-the-counter markets evolve further. It is tough to predict how behavior will change in terms of standardization, clearing and even use of exchange-traded futures. That makes a big chunk of Markit’s business hard to assess—and the timing of its listing another reason for caution.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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