Bloomberg News

LSE-LCH Deal Will Damage Competition, Equiduct Tells OFT

July 26, 2012

Equiduct Systems Ltd., the European trading system owned by Citadel LLC and Knight Capital Group Inc. (KCG:US), told U.K. antitrust regulators that London Stock Exchange Group Plc’s proposed acquisition of a majority stake in LCH.Clearnet Group Ltd. will stifle competition.

The Office of Fair Trading should impose remedies before approving any transaction and ensure access to the clearinghouse is maintained, Chief Executive Officer Peter Randall wrote in a letter to the regulator obtained by Bloomberg News. The OFT, which is studying the deal, should also seek the appointment of independent directors to ensure fairness, Equiduct wrote.

LSE (LSE) is seeking to convince regulators in the U.K., Spain and Portugal that the acquisition of a stake in LCH.Clearnet, Europe’s biggest clearinghouse, won’t stifle competition. LSE owns clearing and settlement units Cassa di Compensazione & Garanzia and Monte Titoli SpA, which it acquired with its 2007 purchase of Borsa Italiana SpA. The European Commission blocked Deutsche Boerse AG (DB1)’s takeover of NYSE Euronext in February, partly over concern it would reduce competition in clearing.

“In the event the LSE acquires LCH it will in essence have control of three separate clearing facilities,” Equiduct, a London-based trading system aimed at retail brokers, wrote in the letter. “It should not be inconceivable therefore that the LSE will look for synergies and since the Italian clearing operations have already migrated onto their proprietary Millennium technology infrastructure that the same fate awaits the newly acquired entity.”

Majority Stake

LCH and LSE shareholders in April backed the clearinghouse’s proposal to sell a majority stake to LSE for 463 million euros ($562 million). The U.K. regulator is consulting on the deal before making a final verdict.

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 even as regulators mandated more clearing to reduce financial risk.

“There must at least be a risk that access and migration policies will be discriminatory,” Equiduct wrote. “The OFT should be particularly careful in ensuring that, conditional upon the transaction being approved, there are strong remedies for anti-competitive behaviour.”

Frank Shepherd, a spokesman for the OFT, and Lucie Holloway, a spokeswoman for LSE, both declined to comment.

‘Numerous Hoops’

“There are numerous, complicated hoops to jump through,” Richard Perrott, exchange analyst at Berenberg Bank in London, said today. “Users are sensitive about clearing access, regulators about clearing location, and competition authorities will ponder fixed-income clearing market share. I’d expect the deal to go through because of the crucial support of major dealers.” He rates LSE hold.

LCH.Clearnet attracted interest from Nasdaq OMX Group Inc. and NYSE Euronext before agreeing to the LSE bid. The firms intend to complete the transaction by the fourth quarter. LCH.Clearnet shareholders, which include banks and brokers that use its services, will retain at least 40 percent ownership.

The LSE offer values LCH.Clearnet at 813 million euros, according to a March 9 statement. Shareholders of LCH.Clearnet will get 19 euros a share in cash plus 1 euro a share from a special dividend.

Chief Executive Officer Xavier Rolet is trying to diversify LSE’s business away from traditional equities after losing market share to alternative trading systems. In December, LSE agreed to buy the 50 percent of FTSE International Ltd. it didn’t already own from Pearson Plc for 450 million pounds ($697 million) in cash. LSE scrapped a bid for TMX Group Inc. last year after failing to win support from the Canadian company’s shareholders.

LSE said in May that second-half profit quadrupled, boosted by money earned from deposits at its Italian central counterparty.

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net

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


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