Following are excerpts from the transcript of a CNBC interview by Geoff Cutmore and Steve Sedgwick, Carsten Kenteger, CEO of Deutsche Borse.
SS: China's economy may be growing at its slowest rate in 25 years, but Deutsche Börse remains undeterred. It recently entered into joint ventures with two Chinese foreign exchange operators in a partnership designed to internationalise the Yuan, as well. I'm delighted to welcome back to CNBC Carsten Kengeter, who is the CEO at Deutsche Börse. Carsten, really nice to see you. I mean, so many issues going on here. Do you want to address the China one first of all? The concern we're seeing on China's stock markets, is it having any rational effect on global markets?
CK: Well, I think the volatility is exacerbated by the fact that market making as we knew it in the past is not in full flow anymore, and therefore you get swings that are harder and perhaps rationality is returning more slowly to what is, you know, as far as I can tell, not fully based on information
SS: And you would put that front and foremost, the fact that in your old place, before then, it was Ackroyd, and then it was S. G. Warburg, and then it was UBS, you could pick up the phone and the market makers would take on a lump of stock. They would take on a block trade. They would have prop traders behind them, and say, 'Yes, we will take on that bit as well.' There are no automatic buffers in the system because the regulators said we couldn't have that anymore.
CK: Well, I think the post-crisis intervention is well intentioned and it has done a whole load of good. It addressed, you know, conduct, compensation, product, balance sheet, liquidity, leverage ratio, net stable funding ratio and everything else, there was a lot of things going on, but one of the things that is certainly an overriding factor is the reduction in balance sheet capacity and leverage capacity of the banks, and they played an enormous part in the past, they still do, in intermediating flows when volatility sets in, and seeing that this is, you know, not happening in the force that we used to see it pre-crisis, we see exaggerated volatility.
SS: Extraordinarily, I think the government wants to almost take their place by putting in their own circuit breakers, their own buffers, as well. So the governments and regulators have put in, certainly in Asia, as well, have put in their own buffers having taken out the private sector ones. It's an extraordinary situation.
CK: I think it's clearly sort of an emergency type of reaction by governments, by officials. However, you know, the role of markets is to have price determination and price discovery occur under rational information sets at any given point in time in the fastest way possible, and when that is interrupted by official intervention then it can't happen for that period of time either, so it's kind of a delay in price discovery that we are finding.
GC: Let's not forget, though, why this happened. And we had a sub-prime crisis, and we suddenly discovered that lots of banks were using their own prop desks for trading on their own account with other people's money that they were holding, and that's the reason why the regulators felt they needed to change the rules, and also the other reason, I think, was to remove the prospect of systemic risk in the system by having a house of cards collapse running through the banking system as a whole, and yet the kind of movements we're seeing in the markets at the moment suggest a lot of investors are worried that there is something lurking still in the banking system, or maybe in the asset management industry, which is enormous now, that could be a threat to the financial economy as a whole. Is that irrational fear?
CK: Well I believe the banks have done an enormous amount of work over the last few years to eliminate and avoid agglomeration in products that might be un-transparent and therefore price discovery would happen at a later stage, causing a surprise effect. So I don't think there is anything lurking, that I can see, in the banking system, per se. Clearly, the money management business, locally, is a very large business, and I think we are moving on from pre-crisis phase to post-crisis phase, and we are still in this transition period which I think makes people a little bit uncomfortable.
GC: And just back to the point where we came in, on the China markets, I had this conversation with Fang Xinghai yesterday, who is western educated, very sophisticated, involved with the regulator now in China, and he made the point that there's been a communication issue here. That the Chinese perhaps need to work a lot harder to explain how the trading curves were meant to work, why they didn't work, why they've done what they've done to the market. Do you think that is solely the key, that they could be talking more to market participants, or they need to do something else to help their capital markets grow up?
CK: Well, it's not solely the key, but there is a lot buried in that answer. The stock markets in China are not really a reflective barometer of overall macroeconomic performance. They do not represent the full breadth of macroeconomic activity in China, so it is understandable why Chinese officials might wish to intervene in this, because they feel it is an unjust reflection on their otherwise still quite enviable performance in the overall economy, albeit it is slowing now.
SS: I'm going to ask you what you do in this environment, from a business perspective. What does the Deutsche Börse do to respond to the current market volatility? Do you look at your suite of products and say, 'We need to push these products a bit more, we need to advise people that there are products where they can protect themselves on the downside'? What is it that the Deutsche Börse does to respond, to take advantage of the current market?
CK: I think, well, first of all, we need to be serving our clients, and what they can rightly expect is stability that is provided by, basically, uninterrupted market functioning, via the infrastructure, via the pipes that we provide the market to market participants. So clearly, in times like this, contracts such as Euro Stoxx is being used for hedging activity, and sometimes in historic record high volumes, so we need to make sure that these products are functioning and working and are being employed in the way they're meant to be. I think market users are, you know, widely aware of the products that we are offering, and other exchanges are offering, as well.
GC: Carsten, we are running our swagger-o-meter this year, and we're trying to get a sense of how European businesspeople feel about 2016 and where we've come from in 2015. Do you think the swagger-o-meter arrow needs to move here, and if so in which direction?
CK: Well, I think we have some slowness in the east, Europe is doing better, actually, I think the export leaning economy is kind of worried about their order books, but away from that everything is improving and the US is doing fine, so-,
SS: Move it up a little bit?
CK: I think we should move it up a little bit.
SS: Ah, okay. You and Tidjane Thiam are the two most bullish people.
GC: Say when.
SS: We'll leave it to about there. There you go. It's only these two segments of the pie, have you noticed? We haven't moved it to those or that in all our guests. So modest-,
GC: I think it's cautiously optimistic Davos man thing.
SS: Cautiously optimistic. Carsten, always nice to see you, thank you so much indeed for your time.
CK: Thanks very much.
SS: Carsten Kengeter, who is the CEO of the Deutsche Börse.