04.25.2012

LCH.Clearnet Eyes U.S. Expansion With IDCG Move

04.25.2012
Terry Flanagan

With upcoming regulations in the U.S. and Europe set to route countless over-the-counter transactions to regulated trading platforms and to clearing houses, the biggest players are bolstering their clearing capabilities.

“With the impending regulation, it’s obvious that clearing will become more important,” said Rich Repetto, analyst at investment bank Sandler O’Neill. “It’s just a matter of when it will occur, but regulators are definitely pushing more over-the-counter trades to standardized clearing.”

LCH.Clearnet, which is itself in the midst of a takeover from the London Stock Exchange, will look to acquire Nasdaq OMX’s International Derivatives Clearing Group (IDCG), facilitating an expansion into the U.S. for the world’s largest interest rate swaps clearing house. The parties on Tuesday signed a non-binding agreement.

“LCH wants to make its SwapClear a more attractive clearing venue in the U.S.,” said Richard Perrott, an analyst at Berenberg Bank. “LCH has been looking to expand its U.S. business of guaranteeing interest rate swaps with the SwapClear clearing house.”

LCH will look to facilitate the deal through a stock swap. In return, Nasdaq would become a minority owner of the clearer.

IDCG is based in New York, and opened in January 2009 for the clearing of interest rate swap futures. It has since struggled to gain significant market share. Nasdaq was one of the many suitors bidding for LCH.Clearnet last year, which was ultimately won by the London Stock Exchange Group. Nasdaq is the majority owner, with the remaining owners consisting of brokers and custodians, including Bank of New York Mellon.

Industry analysts have not been surprised by the move, as the writing has been on the wall for some time now. IDCG has been estimated as weighing down Nasdaq OMX by some $10 million per year in operating losses.

“IDCG was tying up capital at Nasdaq,” said Repetto at Sandler O’Neill. “This also provides some added flexibility in the U.S. for LCH.Clearnet.”

LCH.Clearnet’s SwapClear already operates in the U.S. The acquisition would further enhance its footprint stateside. The acquisition of IDCG would be a natural expansion of LCH.Clearnet’s horizontal clearing model and would join the existing “one-pot” cross-margining arrangement between New York Portfolio Clearing, the Depository Trust & Clearing Corporation and NYSE Euronext. To date, the SwapClear service has cleared a total client notional of more than $686 billion.

LCH.Clearnet is one of three organizations, along with the DTCC and NYSE Liffe US, forming Project Trinity, a collective that plans to combine U.S. rate swaps cleared by SwapClear with cash, futures and over-the-counter swaps in one margin calculation, allowing customers to post less collateral against their portfolios.

The deal for the London Stock Exchange to acquire prized clearinghouse LCH.Clearnet is close to completion after shareholders from both sides earlier this month voted overwhelmingly to approve the deal.

The LSE is set to pay about $611 million for a 60% stake in the clearing house. Shareholders will get about $25 per share in cash and a special dividend of about $1.30 per share.

Over 99.9% of LSE shareholders backed the LCH deal while 94.3% of LCH shareholders gave their approval. The deal now only requires regulatory and competition authority approval for it to go through, and is expected to be completed by the end of the year.

Clearing has become the next frontier for exchange groups looking to expand their operations as the core trade matching business becomes increasingly commoditized. While NYSE Euronext plans to build out its own European derivatives clearing house in London, it will retain the services of LCH.Clearnet for the purposes of cash equities transactions.

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