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Markit - Plumbers in suits

2013-07-10 05:44:24

A private company controlled by banks connects much of the financial system

Jul 6th 2013 |From the print edition

FEW people outside finance have heard of Markit. This week afforded two

examples of how the company has worked itself into the fabric of the financial

system. On July 1st it released a decent set of purchasing-managers indices

(PMIs), a closely watched series of confidence gauges it compiles each month.

That sparked a day-long rally. That same day the European Commission accused 13

big investment banks of having rigged the market for credit derivatives. The

complaint also cited Markit for allegedly helping to prevent exchanges from

entering the business.

The firm started operations only in 2003. It is variously described as a data

provider, an outsourcing partner or a processing expert. None of these labels

quite captures the scope of the company. Sitting some distance behind the front

lines of global finance, it acts as a provider of back-office services to banks

and other investors. Markit staff dub themselves plumbers in suits , helping

data flow to and from market participants, and within firms too.

This is some way off the pinnacles of high finance, but it has proved a

lucrative niche. Fuelled by a string of acquisitions that account for about

half its growth, Markit has soared to near $1 billion in expected revenues this

year, 3,000 employees and a $5 billion valuation (see chart). If it were to go

public, as is perennially mooted, and list in London, where it is based, it

would be a contender for the FTSE 100 index.

Although it clearly enjoys the perks of being a private firm, with few

obligations to detail its accounts, Markit is hardly secretive. Rather, its low

profile reflects the disinterest even those on Wall Street take in the

infrastructure of markets. That left an opening for Lance Uggla, the firm s

Canadian founder and chief executive.

Mr Uggla s big insight, as a former bond trader, was that opaque market

structures made it tricky for banks accurately to price some of the complex

financial instruments they were dealing in. Only by pooling their proprietary

data could they get reliable marks. The trick was first applied to credit

default swaps (CDSs), a sort of insurance policy against borrowers going bust.

Unlike shares, CDSs are not traded on exchanges with transparent prices. They

are bilateral contracts that give rise to a jumble of erratic price quotes.

Only those banks that fed their prices into the Markit system got access to the

aggregate data. They also got a majority stake in the company: Markit s owners

include the likes of Goldman Sachs, JPMorgan Chase and UBS. Staff own 30%, a

handful of other investors the rest.

What came next distinguishes Mr Uggla s approach from that of Michael

Bloomberg, another former bond trader with a successful data franchise. Markit

has moved into a broader role as a partner for banks that want to pool or

outsource costly non-core activities.

At a facility in Dallas, for example, it receives and processes 7m faxes a year

on behalf of customers. Few are of any interest to the recipients they are

mainly updates on the progress of loan repayments but regulations require that

they must be kept on file regardless. Another Markit product helps make sure

that complex deals devised by hotshots on trading floors are recorded and

processed accurately. Yet another ensures all sides to a transaction are using

the same formula when calculating collateral payments. Last year it acquired a

company central to securities lending, a practice that enables short-sellers to

borrow the shares they want to bet against.

Mr Uggla thinks Markit can double in size again in the next three to five

years, and then again shortly thereafter. That would put it in the same league

as Bloomberg, Thomson Reuters or McGraw-Hill Financial (the owner of Standard &

Poor s, a ratings agency). Its hope is that post-crisis regulations will prove

so complex as to send banks scurrying to Markit asking it to take over even

more of their back-office operations.

That may happen. Many banks need to cut costs, and outsourcing is a quickish

way of doing that. Markit is also selling more tailored packages that offer to

solve financial groups headaches by, for example, making sure a firm s

compliance team uses the same bond prices as its accounting department.

Geographically, a recent $500m investment from Temasek, a Singaporean

sovereign-wealth fund, should help it break out of Europe and North America,

source of 90% of its sales.

But plenty of potholes lie ahead. Following the financial crisis regulators

have sought to simplify markets, notably by boosting exchanges at the expense

of over-the-counter deals. For a company that specialises in bringing light to

the murky corners of finance, that is not good news, as Mr Uggla himself

acknowledges. (Markit tried but narrowly failed to buy a clearing house,

LCH.Clearnet, in 2011.) More generally, the company can look like a

conglomerate whose 40 separate product lines are only distantly related. That

is partly the result of its acquisitive bent, which itself may have limits.

Antitrust issues are perhaps the biggest worry. Although the EU probe focuses

on the CDS market between 2006 and 2009, and although Markit denies any

wrongdoing, the investigation may signal that regulators take an increasingly

dim view of banks co-operating with each other, especially via a third party in

which they have stakes. American antitrust regulators have also made inquiries

into Markit.

All sides may be happier if and when the company opts to list its shares,

bringing in new investors to dilute the banks. A listing would bring further

transparency, too. In the meantime, any hesitation from its biggest customers

to push more work out to Markit would seriously dent its prospects. Markit s

ubiquity in such a short time is a tribute to a rare industry success story. It

is also a source of vulnerability.

From the print edition: Finance and economics