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Former MTS CEO Gianluca Garbi is probably one of the best-placed people to gauge the impact of Brexit on the Italian Stock Exchange and its MTS bond trading platform, given that they are part of the London Stock Exchange group. Now that LSE will no longer merge with the Frankfurt’s Deutsche Boerse, it’s time to take a hardheaded look at the future shareholding structure of Italian financial markets. In this interview, he launches a provocative proposal: to place MTS under government management.
OLIVIERI: Is it a good thing or a bad thing for the Italian stock exchange that the merger between the London and Frankfurt stock markets fell through?
GARBI: I think it’s good, since excluding a large portion of the European stock markets—I’m referring to Euronext—would be wrong. It’s good to get back to thinking in terms of the Euro stock exchange.
OLIVIERI: Couldn’t a grouping of the Deutsche Börse and Italian stock market, as a part of the London Stock Exchange group, have served as a base?
GARBI: Yes, but there’s London, which is a financial market that’s leaving the EU. I’m not saying it’s like having an enemy in your house, just a “non-friend.”
OLIVIERI: In any case, the Brexit problem is still unresolved for us.
GARBI: The Brexit is a trenchant decision. I’m convinced that, in order to beat the competition from Asia and other parts of the world, Europe needs to unite. If England leaves, the other countries must join forces in order to be more competitive. And the stock markets are a key factor in competitivity, since they allow businesses to become known and raise capital for development. It’s a field where public interest prevails over the private interests of the market/company’s shareholders.
OLIVIERI: But isn’t the London Stock Exchange interested in keeping one foot in the EU, thanks to Milan?
GARBI: Both London and its financial community are interested in keeping a foot in the EU, but it’s not in Italy’s interests to be kept hostage in a situation where they’re risking everything remaining frozen for at least two years.
OLIVIERI: So how does Italy escape?
GARBI: Escaping is possible: it’s provided for in Italy’s banking and financial market laws, which allows the Treasury to take ownership of the Italian Stock Exchange if it judges that national interests should come before the market/company itself.
OLIVIERI: Is that also true for MTS, the wholesale government bond market that resides within the Italian stock market?
GARBI: MTS is more concerned about the market’s liquidity, with half of its participants, the primary dealers, based in London.
OLIVIERI: But aren’t they moving because of the Brexit?
GARBI: That’s not true, none of the primary dealers are doing so. The transfer announcements have to do with marginal activities, not the front office. The traders are physically based in London, a city that has an environment—in terms of the job market, physicality, mentality, and language—which is unmatched by any other European city. A large part of the liquidity in Euro is currently traded in London, it’s by no means certain that this activity will transfer to the Euro markets.
GARBI: This is fine right now, since there are communal rules which everyone respects. But right when the divorce happens, no one knows what will leave. London, which has a hand in the trading platforms, will control the flows and will be less inclined to make concessions for the EU.
OLIVIERI: It seems like this situation worries the ECB, as well as post-trading organizations that deal with compensation and liquidation operations in Euro, including government bonds.
GARBI: Yes, absolutely. It would be unthinkable to carry out a monetary policy with transactions that take place in of areas where they can’t exercise their control. But that’s true, in general, for market security. If, for example, they decide to limit short selling, they can’t do so for transactions that take place beyond their borders. Or if they’d want to investigate potential market abuse, they’d have to produce letters rogatory.
OLIVIERI: Does placing the markets under government control mean separating from London?
GARBI: I hope that a deal can be reached with London, where everything stays just as it is today. Placing the Italian markets under government control would be an incentive for London to begin negotiating promptly. The underlying problem is the intermediaries, the oversight authorities: currently, in the EU, they’re forced to share information.
OLIVIERI: Could that create a conflict between the overseers, who need to maintain supervision, and those who are being overseen, who might be interested in avoiding this?
GARBI: The risk is that this could become “regulatory shopping,” which is constantly on a downward trend.
OLIVIERI: The Italian stock exchange’s regulatory body, CONSOB, has asked the London Stock Exchange to comply with the Italian authorities on all of the Brexit’s details, as far as they concern the Italian market’s organizations, the Italian stock market, MTS, CC&G, and Montetitoli. Isn’t this enough?
GARBI: The Treasury is the one that should who organize a government takeover, not CONSOB and Bank of Italy. I hope that this happens sooner rather than later: let’s pique London’s interest and put pressure on the British government!
OLIVIERI: So, the proposal is: let’s not separate from London, but instead we’ll “compel” the London market into staying in Europe?
GABRI: Yes, exactly.
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