image

China-US relations

China-based investors bid to buy Chicago stock exchange blocked

US regulators say murky details about the deal, including who the buyers are, would make it impossible to properly oversee the workings of the bourse

PUBLISHED : Friday, 16 February, 2018, 3:02pm
UPDATED : Friday, 16 February, 2018, 3:02pm

US regulators on Thursday killed the politically sensitive sale of the Chicago Stock Exchange to a group led by China-based investors, saying a lack of information on the would-be buyers threatened the ability to properly monitor the exchange after the deal.

The move by the Securities and Exchange Commission ends a two-year battle to gain approval for the sale and underscores the more hostile environment facing Chinese buyers under the administration of US President Donald Trump.

Trump brought the Chicago exchange (CHX) deal up twice during the election campaign as an example of how jobs and wealth were leaving the United States.

Exchange commission staff initially approved the sale of the privately owned exchange in August, but within minutes of the announcement commissioners, led by chairman Jay Clayton, a Trump appointee, put the decision on hold for further review.

Two Chinese bidders for Chicago Stock Exchange said to have dropped out

US lawmakers from both parties had harshly criticised the deal in joint letters to the commission, arguing that it would give the Chinese government access to American financial markets and questioning the commission’s ability to regulate and monitor foreign owners.

“This has been a long fight and I am grateful we now have a president who recognises the national security threats of allowing a Chinese government affiliated company to own the Chicago Stock Exchange,” Republican Congressman Robert Pittenger said in a statement on Thursday. “We must continue to be vigilant, with thorough oversight, to prevent the highly coordinated and strategic efforts of the Communist Chinese government to threaten our national security through malicious business investments.”

CHX is a niche player in the industry, handling just 0.5 per cent of US equities trades.

The acquisition, which was proposed in February 2016 and worth about US$25 million, was led by Chongqing Casin Enterprise Group, a privately held company that invests in real estate development and financial holdings.

Casin, through CHX, has denied any affiliation with the Chinese government and no connections have been shown.

CHX declined to comment on Thursday on the final decision.

US shoots down MoneyGram’s sale to China’s Ant Financial

The commission’s decision comes at a time of rising trade tensions between China and the United States.

In the latest signs of friction, Beijing earlier this month launched an anti-dumping investigation into US sorghum shipments following the US Commerce Department’s “self-initiated” dumping probe into Chinese aluminium imports in late November.

The Chinese foreign and commerce ministries did not respond immediately to emailed and faxed questions requesting a comment. Friday is Lunar New Year’s day, a public holiday in China.

Casin had said it saw potential in CHX and that its long-term goal was to list Chinese companies in the United States on the bourse. It also planned to eventually build an exchange in China using CHX technology.

If the deal had been approved it would have marked the first time Chinese investors had been direct owners of a US stock exchange, although not the first time a US exchange had foreign owners. Deutsche Boerse bought the US-based International Securities Exchange for US$2.8 billion in 2007, before selling it to Nasdaq Inc for US$1.1 billion in 2016.

The CHX deal was approved in December 2016 by the Committee on Foreign Investment in the United States, which scrutinises deals for potential national security concerns, but also needed exchange commission approval.

The Wall Street regulator on Thursday did not mention the China connection, but said it found several reasons why the deal did not meet laws governing the ownership of US exchanges, which are stricter than usual ownership rules due to the role they play in the economy.

Critically, the commission said in a filing posted on its website that it was not satisfied about the source of funds for the deal and who the ultimate consortium owners would be, raising worries the structure of the deal could allow new, unknown entities to assume stakes over time.

The commission, which conducted its own extensive due diligence when reviewing the case, said that the CHX was not able to provide key information it had requested, including access to the potential owners’ books, “leaving various questions unanswered”.

The CHX’s inability to verify the ultimate potential owners would also make it difficult for the bourse to satisfy its ongoing compliance monitoring obligations and would obstruct the commission’s own capacity to oversee CHX, it said.

In particular, the commission said it was not satisfied it would have full access to the exchange’s books and records if the deal were to go through.

US blocks on China deals risk backlash

After a two-year delay, the decision puts CHX’s future in doubt. The exchange said it needed the infusion of capital to invest in its operations and attract business.

CHX’s other key initiative to boost its volumes centres around giving certain trading firms faster access if they agree to strict trading obligations aimed at making it easier for others to buy and sell stocks on the exchange.

Commission staff approved that plan in October, but its commissioners also put that decision on hold and there is no deadline for a further ruling.

Technically, CHX could still resubmit its proposal or seek other buyers.

CHX competes against the New York Stock Exchange and its three affiliated exchanges, all owned by Intercontinental Exchange and Nasdaq Inc and Cboe Global Markets, both of which own four US stock exchanges.