Source: The Financial Times                          Date: 13 April, 2011

Last week Mr. Xavier Rolet, chief executive of the London Stock Exchange, could be found not in Canada – where a proposed LSE merger with its counterpart in Toronto is being scrutinized by regulators – but in Mongolia. Ulaanbaatar may seem an unlikely destination for the man running an exchange whose future may well depend on the successful completion of its merger with TMX Group, but Mr. Rolet was there to sign a deal with the Mongolian Stock Exchange. The British bourse is providing advice to the Mongolians as they try to modernize their 20-year old exchange.

But this is no standard deal involving one mature western exchange and a relatively undeveloped minnow in a remote emerging market. The LSE is also sending a team from London to take over the management of the Mongolian exchange and to “oversee its development and privatization” under a two-year contract.

For the LSE, the bet is that getting involved early in the development of Mongolia’s nascent market structure will put it in pole position to capitalize on the country’s emergence as a mining and natural resources hot spot, amid what economists are calling the commodities “supercycles”.

Mr. Rolet will be hoping that big initial public offerings coming from Mongolia in the future will choose London over Hong Kong or New York. Next could come dual listings of Mongolian companies in Ulaanbaatar and London. One Mongolian company is already listed on the LSE: Petro Matad, an oil and gas explorer quoted on Aim since May 2008.

Asked why Mongolia would go as far as handing the management of its national exchange to foreigners, Mr. E. Oyun, deputy chairman of the Mongolian Government’s State Property Committee – which owns the exchange – said, “If you have a new Ferrari and you are not a good driver, how can you drive it? We want to put a Formula One driver in here.”

Mongolia is watching as China, eager for Mongolia's commodities such as coal and copper, is becoming increasingly active in extractive industries. Mr. Oyun said Ulaanbaatar hopes to use London as a gateway through which to channel inward capital flows. “We need to diversify our sources of investment,” he said. That is one reason why a representative from the Mongolian exchange will be based at LSE headquarters.

Mr. S. Batbold, Prime Minister of Mongolia, has said that the LSE was “the best possible partner” to support the country’s ambitions for its bourse. His government has tried to harness the boom in foreign-led mining and metals investment to national development goals. One example is the scheme for privatizing Tavan Tolgoi, an enormous coal deposit in the Gobi desert. But until then liquidity remains thin and the exchange is relatively rudimentary. “The distribution of shares in Erdenes Tavan Tolgoi and other announced privatization initiatives involving local capital market listings require as a precondition a relatively liquid and reasonably functioning stock exchange,” said Mr. James Passin, principal at Firebird Management, a New York-based fund that is one of the country’s largest foreign investors.

Mr. Oyun said, “We are expecting much from the LSE. After two or three years we want to have a ‘mini LSE’ in Ulan Bator.”