Bloomberg News

LSE Joins Bidding for Swaps Clearinghouse LCH.Clearnet

September 02, 2011

(Adds analyst in fourth paragraph, closes shares in ninth.)

Sept. 2 (Bloomberg) -- London Stock Exchange Group Plc is holding talks with LCH.Clearnet Group Ltd. to buy all or part of the world’s biggest clearinghouse for swaps as increased global regulation of derivatives makes the business more profitable.

LSE’s approach to the London-based company creates a three- way bidding war, challenging a similar move by Markit Group Ltd., which provides data on swap prices. Nasdaq OMX Group Inc. is also seeking a minority stake in LCH.Clearnet Group Ltd., Nasdaq Chief Executive Officer Robert Greifeld said on June 17.

Interest in LCH intensified after Deutsche Boerse AG and NYSE Euronext agreed to merge in February, creating the world’s largest exchange operator by market value and winning a dominant share of futures trading in Europe. NYSE Euronext Chief Executive Officer Duncan Niederauer said on June 1 that he was working with Markit on its bid for LCH.Clearnet.

This would give “the LSE an integrated model and increased scale at a time when Deutsche Boerse-NYSE could be about to become the dominant force in European market infrastructure,” wrote Karl Morris, analyst at Keefe, Bruyette & Woods Inc. in a note today. Also, “it provides the conduit through which the LSE can capture far more post-trade service revenue.”

LCH.Clearnet’s SwapClear began clearing interest-rate swaps traded between banks in 1999. As of March it had cleared more than $266 trillion in notional amounts of rate swaps, the company said at the time.

LCH.Clearnet said on May 28 it had been approached about “some form of possible business combination.” It held talks with LSE, three people familiar with the matter said at that time. LSE said May 31 it wasn’t in talks with LCH.Clearnet.

Market Consolidation

Clearinghouses such as LCH.Clearnet and Deutsche Boerse’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the threat from a trader’s default.

Exchange operators from New York to Frankfurt and Singapore have sought takeovers to augment equity businesses after regulation and automated trading eroded profit. Nasdaq, which dropped a bid for NYSE Euronext, is the majority owner of International Derivatives Clearing Group LLC, which opened in January 2009 for interest-rate swap futures.

LSE’s offer values LCH at 1 billion euros ($1.4 billion), the Financial Times reported, without saying where it got the information. LSE fell 21.5 pence, or 2.3 percent, to 911 pence at the 4:30 p.m. close in London, snapping eight days of gains.

The banks that created over-the-counter derivatives in the 1980s are seeking control over how the $601 trillion market changes under new regulations in the U.S. and Europe.

Dodd-Frank Rules

The Dodd-Frank Act mandates that most swaps be processed by clearinghouses and that all trades are reported to data repositories. The European Union earlier this year moved closer to adopting a clearing mandate for most interest-rate, credit- default and other swaps.

As regulators urge more clearing for derivatives, exchanges such as Deutsche Boerse, NYSE, Intercontinental Exchange Inc. and CME Group Inc., which own clearinghouses or have the so- called vertical model that locks in trading and post-trading, are offering more services. The banks that dominate the market are seeking to take stakes in clearinghouses or strike profit- sharing agreements.

LSE, which tried and failed to buy the Canadian exchange earlier this year, lags behind its rivals in the clearing business.

The exchange is “in discussions with LCH.Clearnet regarding a potential transaction,” LSE said in a statement on the Regulatory News Service today, adding talks were at an early stage. It gave no details on price or the size of stake sought.

--With assistance from Nikolaj Gammeltoft in New York Editor: Will Hadfield, Guy Collins

To contact the reporters on this story: Nandini Sukumar in London at nsukumar@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net


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