LSE revives its bid for LCH.Clearnet
The London Stock Exchange submits second bid for majority stake in LCH.Clearnet as it looks to consolidate its clearing business in Europe.
Earlier in the summer when I interviewed Kevin Milne, head of post-trade at the London Stock Exchange (LSE) about his plans for the business, I asked him whether an acquisition of LCH.Clearnet was on the cards. At that time, I was quoted the official line suggesting that the exchange was not interested in acquiring LCH.Clearnet.
At that point, of course, the LSE was still trying to pull off its attempt to acquire TMX Group, owners of the Toronto Stock Exchange. Weeks after my interview with Milne, the LSE announced that its Canadian love affair was over having failed to secure the majority it needed for the acquisition to go through. During my interview with Milne, he also expressed a desire to transform Cassa di Compensazione e Garanzia (Cassa) the Italian clearinghouse it acquired following its merger with Borsa Italiana, into a pan-European clearinghouse.
He talked up Cassa's "real-time risk management" across nine asset classes, but despite his ambitions for Cassa, it does not have the track record of the UK's LCH.Clearnet when it comes to derivatives clearing, and with the remainder of derivatives clearing licenses locked up in "vertical silos," with a duopoloy likely to become a monopoly if the NYSE Euronext and Deutsche Börse merger goes ahead, LCH.Clearnet suddenly looks attractive again.
Perhaps it never looked unattractive, but according to reports in The Financial Times, the LSE's current bid for a majority stake in LCH.Clearnet may be more welcomed this time given that the clearinghouse has a new CEO, Ian Axe. The deal is far from conclusive as LCH.Clearnet is still pondering an earlier offer from Markit, and the LSE doesn't have the most successful track record when it comes to pulling off mergers of this nature.
The LSE is also a customer of LCH.Clearnet, which is one of the four clearinghouses it uses in Europe. Milne said it wanted to consolidate its post-trade business among three clearers, instead of its current four, so looks like LCH.Clearnet is among those it wants to see in the final pack. It would also help the exchange reduce the costs it passes on to its customers by having to use four clearers, and it obviously believes there is money to be made in clearing.
It appears John Gubert's comments from last August when LSE chief executive, Xavier Rolet resigned from the board of LCH.Clearnet, still hold true: "It has been clear for some time that the LSE sees clearing as a future profit centre rather than a cost. Only a quick scrutiny at the P & L of Deutsche Börse shows the value of a CCP as an addendum to a trading platform," remarked John Gubert, independent consultant and contributor to financial-i magazine. In its half-yearly results published in Q2, Eurex, the clearing arm of the German exchange was the strongest performing business in terms of sales revenues (EUR 246.1 million) in Q2 2010 compared to EUR 191.9 million for its depository business, Clearstream.
At the time Gubert said the future of LCH.Clearnet as an independent must be in doubt as it appears to have a weakening link into some of its key clients. "The move to more vertical infrastructures makes the need for interoperability ever more important so that we avoid "captive" clients being forced to pay excessively by monopoly suppliers."
Date Posted:2nd September 2011