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Questions of depth as Irish exchange eyes Brexit boost to equities biz

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Questions of depth as Irish exchange eyes Brexit boost to equities biz

The Irish Stock Exchange will pursue a €10 million expansionof its headquarters to make room for 50% more staff, which its CEO describes aspart of plans to coax London listings to Dublin following Brexit. But she facesan uphill struggle to expand the exchange's business beyond its current nichespecialisms, according to experts.

Dublin is among a handful of eurozone financial centersfrequently mentioned as a destination for business exiting London in the wakeof the vote to leave the EU, with firms expected to seek ways of maintainingaccess to the single market through the so-called passporting regime. The ISEhas long been a go-to venue for debt securities and fund listings, but in thewake of Brexit, CEO Deirdre Somers has her eye on a chunk of London's equitylisting business as well.

"Brexit undoubtedly creates opportunities for Irelandand the ISE," Somers told S&P Global Market Intelligence, adding thatalthough it is too early to say whether there will be a trend of capitalmarkets businesses relocating from London, Ireland is "as close as you canget to replicating the U.K. environment in another EU jurisdiction."Somers has increased headcount by 20% over the past year and said she plans a"Brexit Unit" to focus on coaxing over listings from London, pointingout that operating with a prolonged period of uncertainty is "not anoption" for firms.

Debt leader, butequities lag

The ISE's debt and funds listing businesses are worldleaders, with more than 35,000 securities listed as of the end of June. Over70% of its revenue comes from international business lines, with hedge funds inparticular making use of the Dublin debt market for tax reasons, according toThomas Conlon, director of the Centre for Financial Markets at UniversityCollege Dublin.

But to lure a large number of the roughly 10,000 debtinstruments now listed on the London Stock Exchange, he said in an interview,the ISE will need to develop more liquidity in its secondary market and movebeyond pure regulatory arbitrage as an inducement to list in Dublin. Theexchange might do this by offering reduced fees to traders who agree to act asmarket makers, he noted.

And despite Somers' interest in expanding equity listings,moving outside its specialist area would be ambitious for the ISE, said BrianLucey, a professor of finance at Trinity College, Dublin.

"They've a niche — it's very practical and verylucrative and they're very good at it," Lucey told S&P Global MarketIntelligence, adding that Dublin and Luxembourg will likely pick up debt andtrust business that would otherwise have gone to London. But he also said"it's more unusual than usual that companies would go for an IPO on theIrish market."

In recent years, the ISE lost the primary listings ofbuilding materials groups CRH and Grafton Group, food manufacturer Greencoreand packaging firm Smurfit Kappa to London, although it did attract three realestate investment trusts. Firms that floated in 2015 included Irish lifescience company Malin Corp., which raised €330 million; petrol garage chainApplegreen, which raised €70 million from new shares and was valued at about€300 million; and booking platform Hostelworld, which raised €180 million andwas valued at €245 million in a Dublin-London dual listing.

Somers expects two of the 10 firms in the Irish StockExchange's "IPOready" initiative to float within the next year. Butarguably Ireland's most significant pending listing has already been earmarkedfor London, with Finance Minister Brian Noonan saying in December 2015 that thegovernment would seek an LSE primary listing for its stake in , rather thanopting for the ISE.

Depth an issue

The key problem for the Dublin bourse remains a lack ofdepth in the Irish equities markets, "in terms of corporate listings, [or]in terms of analysts' coverage," said Constantin Gurdgiev, a professor offinance at California's Middlebury Institute of International Studies atMonterey. The ISE would also face "steep competition fromother euro area financial centers" should it try to broaden its horizons,and it is swimming against the stream by adding staff in an era oftechnological investment, Gurdgiev said in an interview.

"Across all areas of listings, ISE is facing twinpressures of growing competition from neighboring regional exchanges and theglobal trend toward regionalization of investment," Gurdgiev said."All of this is coinciding with growing commoditization of trading offers,with technology acting as an enabling driver for automated analytics and datatransmission, lowering listings costs and driving down profit margins, just ascompetition is growing."

That leaves the ISE facing a difficult choice, he said:Consolidate through a merger or strategic partnership, "or stay as is andwitness [a] growing squeeze from the competition."