Bloomberg News

London Stock Exchange on Review for S&P Downgrade Due to Italy

December 09, 2011

Dec. 9 (Bloomberg) -- London Stock Exchange Group Plc, the equity-market operator that also owns a clearinghouse in Italy, may have its credit rating cut by Standard & Poor’s because Italian banks’ finances are deteriorating.

S&P has begun reviewing whether to downgrade LSE’s A- long- term issuer rating, according to a statement released today. An announcement will be made within three months, after S&P completes its evaluation of credit grades on the Italian government and the nation’s banks, S&P said.

LSE “is materially exposed to unsecured credit risk to Italian banks,” New York-based S&P said in a report today. “The creditworthiness of these counterparts has been deteriorating over the past several months.”

Credit-default swaps on European banks such as UniCredit SpA, Italy’s biggest lender, show the odds they will be unable to repay their debt has increased. The exchange bought Cassa di Compensazione e Garanzia SpA, the Italian clearing unit, when it purchased the Italian bourse in 2007.

The expanding European debt crisis drove credit-default swaps on Milan-based UniCredit as high as 688 basis points, a record, on Nov. 25, according to data compiled by CMA.

Clearinghouses manage counterparty risks by building guarantee funds and requiring cash collateral margins on transactions. They typically reinvest the collateral to earn profits for shareholders.

Goldman Sachs Group Inc. cut its recommendation on LSE shares to “sell” on Nov. 15, citing concern about the sustainability of CC&G’s net interest income, or income LSE earns from taking margin or deposits from traders who use its Italian central counterparty.

The exchange takes the margin deposits, pays the depositors interest and earns income by investing the funds for the short term in the Italian interbank market.

“If a treasury counterpart with whom it has placed cash defaults, it is CC&G who bears the loss, not the clearing members,” S&P said. “The creditworthiness of LSE Group is, to a potentially meaningful extent, linked to key counterparts in the Italian banking sector.”

--With assistance from Mary Childs in New York. Editors: Nick Baker, Chris Nagi

To contact the reporter on this story: Nandini Sukumar in London at

To contact the editor responsible for this story: Andrew Rummer at

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