LCH.Clearnet Ltd. will seek new business from swap futures, over-the-counter contracts and client clearing after selling a majority stake to London Stock Exchange Group Plc (LSE), chief executive officer Ian Axe said.
The London-based clearinghouse will be 57.8 percent owned by LSE after the takeover, which values LCH at 633 million euros ($824 million). The exchange will pay 15 euros a share, including 1 euro in cash that becomes payable on Sept. 30, 2017. After the deal completes, LCH will raise 320 million euros in capital to meet new regulatory requirements. Nasdaq OMX Inc., which is setting up a new London-based derivatives market, NLX, will increase its stake in LCH to 5 percent from 3.7 percent as part of the LSE deal.
Clearinghouses and exchanges expect their trade-processing businesses to grow as U.S. and European regulators push more derivatives through them to reduce risk and as fund managers seek access to over-the-counter services. Banks and brokers, which own the rest of LCH.Clearnet, are also grappling with the new rules and how they may affect their own businesses.
“There’s a massive regulatory agenda,”Axe, LCH.Clearnet’s CEO, said in an interview. “In Europe itself, we have NLX and Nasdaq seeking regulatory approval; we are looking forward to working with them.”
As of yesterday, companies from JPMorgan Chase & Co. to BlackRock Inc. (BLK:US) must have most of their privately negotiated swaps trades backed by a capitalized clearinghouse, under the 2010 Dodd-Frank Act. In Brussels, rule makers are drafting the European Market Infrastructure Regulation.
Clearinghouses and exchanges plan to benefit from a trend to turn swaps into futures contracts, known as futurization.
The majority of the $18 trillion energy-swaps market traded on CME (CME:US) Group Inc. and IntercontinentalExchange Inc. shifted to futures in October so that users could avoid the higher regulatory costs associated with being a dealer or a major-swaps participant. ICE (ICE:US) yesterday said it will make four credit-index futures contracts available from May.
LCH’s plans to handle swap futures are “at the strategic- planning level at the moment,” Axe said on March 8. “We have platforms and risk-management systems in place and have a history and tradition in the listed-derivatives space. Still Dodd Frank doesn’t mean you have to futurize. We clear a huge number of products that are OTC.”
Money managers such as New York-based BlackRock, the world’s largest asset manager, and Citadel LLC, the Chicago- based hedge-fund and securities firm run by Kenneth Griffin, cleared swaps trades before yesterday’s deadline. LCH.Clearnet, ICE and CME run the three largest clearinghouses for the derivatives. LCH operates SwapClear, the biggest clearinghouse for interest-rate swaps.
LCH’s profit almost tripled in 2012 as revenue from the over-the-counter business climbed. Profit after taxes rose to 59.7 million euros from 21.2 million euros in 2011, the company said on Feb. 15.
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