LCH.Clearnet Group Ltd., the clearinghouse that is selling as much as 60 percent of itself to London Stock Exchange Group Plc (LSE), wants NYSE Euronext to remain an owner and client, Chief Executive Officer Ian Axe said.
LSE agreed to buy a majority stake in London-based LCH.Clearnet for 463 million euros ($605 million) to expand its post-trade services, the exchange operator said in a statement on March 9. LCH.Clearnet, the world’s biggest swaps clearinghouse, is seeking to expand its post-trade and risk management offerings in the U.S. and Asia, Axe said on March 12.
NYSE Euronext, owner of the New York Stock Exchange, has said it would stop using LCH.Clearnet’s post-trade services for European securities and derivatives in 2012. It extended that until 2013 last year as it worked to build support for its merger with Frankfurt-based Deutsche Boerse AG, which European antitrust regulations blocked last month. While NYSE Euronext (NYX)’s Liffe operation said it planned to cease using LCH.Clearnet’s post-trade services for its London-based derivatives business, it never issued a written termination notice.
“NYSE Euronext is an immensely important client,” Axe said. There will be “lots of opportunities with NYSE in listed derivatives and other areas,” he said during an interview in Boca Raton, Florida, where he was attending a Futures Industry Association conference.
Clearinghouses 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. The businesses have become more attractive as regulators globally seek more central clearing of derivatives currently traded by individual counterparties away from exchanges.
LCH.Clearnet shareholders, which include banks and brokers that use its services, will retain at least 40 percent ownership. LSE wanted to purchase 51 percent of LCH.Clearnet and said it would go as high as 60 percent depending on how many shares are tendered. NYSE Euronext had a 9.1 percent stake in LCH.Clearnet and the right to appoint a director at the end of 2011, according to a regulatory filing.
The LSE offer values LCH.Clearnet at 813 million euros, according to the March statement. Shareholders of LCH.Clearnet will get 19 euros a share in cash plus 1 euro a share from a special dividend, LSE said.
LCH.Clearnet, whose SwapClear service began clearing interest-rate contracts traded between banks in 1999, has seen its market share in equities eroded by new entrants. Its biggest customers, such as NYSE Euronext and the London Metal Exchange, are considering clearing their own trades and two chief executive officers have departed in less than six years. Axe joined in April from Barclays Plc where he had been chief operating officer for Europe, the Middle East and Africa.
Product Governance Boards
LSE intends to entice rival exchanges to continue using LCH.Clearnet’s post-trade services, Axe said. The company may establish product governance boards that include users and representatives from venues in European equities and exchange- listed derivatives, he said. The boards will give participants a say in matters such as fees, replicating setups in LCH.Clearnet’s SwapClear and other over-the-counter derivatives clearing businesses, he said.
“If a competing trading venue were to play in product governance, they’d have as much control over the product governance as LSE,” Axe said. “They’d have equal say in pricing, technology and risk management.”
That would give other trading venues incentives to process financial or other products through the clearinghouse, Axe said. He said the LSE is committed to the arrangement.
While the idea of sharing control of the product governance committee may appeal to a “start-up” exchange, it’s not as likely to interest Liffe, NYSE’s London-based derivatives market, Richard Perrott, an exchange analyst at Berenberg Bank in London, said in a phone interview. NYSE Euronext may remain a shareholder since “it gives them a share of LCH’s profits, but their primary driver is their own derivatives clearing strategy and how to execute,” he said.
LSE had been in talks with the London-based clearinghouse for more than six months. LCH.Clearnet had also attracted interest from Nasdaq OMX Group Inc. (NDAQ) and NYSE Euronext, which planned to bid in partnership with Markit Group Ltd.
Axe said the LSE deal will offer LCH.Clearnet opportunities for geographic expansion and growth across asset classes. The exchange’s support of a horizontal model, in which the clearinghouse offers services to multiple venues instead of mainly those owned by the same company, as is the case with Deutsche Boerse’s Eurex Clearing and Chicago-based CME Group Inc. (CME)’s post-trade business, may draw business from new markets, he said.
LCH.Clearnet plans to expand its U.S. business around interest rate swaps and may then consider foreign exchange offerings, Axe said. The company also wants to extend its post- trade equities services to Asian markets and LSE’s index business may provide opportunities in that region, he said.
LSE agreed in December to buy the 50 percent of FTSE International Ltd. it didn’t already own from Pearson Plc for 450 million pounds ($706 million) in cash as it seeks to expand in derivatives. The acquisition of FTSE International, which publishes the U.K.’s benchmark FTSE 100 Index and more than 200,000 other gauges, is expected to be completed in the first quarter of this year, the two companies said in December.
The deal between LSE and LCH.Clearnet, which is expected to be completed by the fourth quarter, is subject to shareholder votes at both companies and antitrust reviews, according to the March 9 notice.
“There are no great concerns on the antitrust side,” Perrott said. “Unlike the Deutsche Boerse-NYSE deal, the users seem to be actively behind this one and that ultimately makes for fewer competition concerns.”
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