Xavier Rolet, the chief executive of the London Stock Exchange, knows how to handle danger; the Frenchman has raced in four Paris-to-Dakar rallies, two of them successfully, the others with less luck. His car engine blew up on one, while on another he was ambushed by Mauritanian terrorists.

Rolet will be missing from next year's rally, partly because the insurance to cover him costs so much, but also because he's busy steering the exchange down its own fast track. And, after what seemed some dithering, Rolet announced last month that he is planning to launch London's own equity derivatives market.

But Rolet's entry into this profitable, high-margin, pan-European sector, which produces €1.2bn a year, has been greeted with derision by the Franco-American and German exchanges and scepticism from industry watchers for being too little too late. Rolet notes the concerns but dismisses the fears.

"Liffe and Deutsche Börse's Eurex exchanges run a duopoly, and in all duo­polies there is room for a third competitor. I don't pretend it's going to be easy to compete, and it will take time. But we have innovations, new products and the new Sola technology that will allow us to compete effectively. We see weaknesses in many of their products and are working on some new ones which we think customers will like," he says.

If all goes to plan, the new trading platform, Turquoise, now run with some of its biggest bank customers, will roll out a pan-European offering early in the new year, starting with equity options and using a combination of LCH Clearnet and Italy's CC&G for clearing. Rolet is so optimistic that over time – he's giving it five years – he hopes to get 25% of all the London exchange's revenues from derivatives compared to only 6% today.

There are other changes afoot that make this a good time for him to be breaking the duopoly. First, the EU is likely to investigate competition issues that have protected the two big players. Second, more than three-quarters of all equity options are now traded over the counter. With regulators pushing for more transparency, more of these products will be brought on exchange; he wants to capture them first.

One area he has grown from scratch since taking over 18 months ago is the new corporate bond market; it now has 150 listed company and government bonds and its volumes in October were six times those of August. Retail investors in Italy – London and the Borsa Italiana are merged – are among the most active, with an appetite for RBS and Barclays bonds, while it's proving to be a fertile market for mid-sized companies raising capital for expansion. It's the small- to medium-size enterprises that he is most keen to nurture but they are not good enough for Rolet.

"We still have a culture that favours debt rather than equity, which is extraordinary considering the crash. We need to change the balance. Debt is tax-deductible for most companies and private equity firms, but investing in equity is taxed four times – corporation tax, capital gains tax, stamp duty on share transactions and then personal income tax."

Like his predecessors, he is lobbying the British government to kill or at least reduce stamp duty. Dropping it, he believes, will encourage trading and more than outweigh the losses to the treasury. Even if it was done only for SMEs, he argues, the loss would be worth every penny. He has four other fiscal incentives he's trying to persuade the government to adopt, including relaxing tax for venture capital trusts investing in small start-ups, a more favourable CGT regime for investing in quoted companies, letting VCTs invest in the secondary market, and allowing ISA investment in quoted companies as well as giving big companies R&D tax breaks so they could invest in new businesses and give a boost to private-sector growth.

"Companies in the US have about $2 trillion cash on the balance sheet which is not being used; they should be encouraged to invest in start-ups in their sector by giving them tax breaks. Microsoft could be investing in other high-tech companies, for example. In Europe, there's €1.5bn sitting around doing nothing – why don't we give them tax breaks so they can fund the next generation of entrepreneurs?"

The politicians he talks to agree that adjusting the system away from debt-reliance towards securitisation is a no-brainer. So far, though, they have not been brave enough to move because all these measures would cost money.

"Is there ever a bad time to do a good thing? It's not capitalism that people dislike so much, but the booms and busts that go with it. And the booms have nearly always been caused by a build-up of debt, of leverage in the system," says Rolet. "Only the internet bubble of 2000 was rather different – it was an equity valuation boom so collapsed without too much pain. But the past decade was one of debt addiction. Everyone was on steroids; the regulators, the politicians and the bankers and traders all got carried away. This must be changed. If the system were skewed back towards equity – you could say, proper capitalism – then maybe we could have a more balanced economy and society."

That's why retail investors should be encouraged back into the market as they are in Italy, where a third of shares are owned by small investors, which in itself brings stability. For now, the outlook for new listings on the London exchange looks good; there's a pipeline of companies hungry for capital as they restructure their balance sheets.

"It's Catch-22: there's a vicious circle to undo before we get to the virtuous circle. Equity markets have been volatile but as they calm down you will see they are undervalued against bonds." But on the broader economic outlook he's more pessimistic, predicting that France will follow Spain and Portugal as a target for the markets.

"France is the next one to go; its debt, when you take into account all the off-balance-sheet debt, is enormous but it can't be hidden. The markets will get there. I see tough times ahead and the death of the European social model. But the Germans will take charge and impose fiscal union and these countries will be forced to take serious action. So the euro will emerge stronger."

Rolet has his work cut out to get the exchange back leading the pack; it's down to 15th place by valuation in world rankings. The share price is back to 767p – far from the £19 price during takeover fever. After so many fights with suitors over the past decade, the talk is back that Euronext and Deutsche Börse – now eight times the size of London – are eyeing up the LSE again. Will there be more takeovers, and can London be at the forefront?

"Yes and yes," he says. "After the crash there is a greater need for exchanges than ever. They need to be integrated, to have harmonised governance, systems and products so there will be more global alliances. Whether this is through takeover or joint ventures, we will see."

Xavier Rolet CV

Age: 51

Education: Columbia University, MBA

Career: Robert Rubin, Goldman Sachs, Credit Suisse First Boston, Dresdner Kleinwort Benson, Lehman Bros

Hobbies: Beekeeping, diving, fishing, skiing, rally driving