05.07.2019
By Shanny Basar

LCH Clearing in ‘Robust Health’

LCH, the London Stock Exchange Group’s clearing arm, is in “robust health” according to Chris Turner, analyst at German bank Berenberg, despite the possible threat to the business as the UK leaves the European Union.

Turner said in report: “LSE is a play on two key structural growth themes: secular growth in clearing and increased adoption of quantitative investment approaches. The group’s first-quarter results suggest that the former is in robust health, while the latter is more likely to deliver high single-digit revenue growth than the low double-digit growth we had hoped for.”

The exchange reported in its first quarter results on May 1 that income at LCH was up 17% to £182m ($238m). There was a 16% revenue growth from a year ago in over-the-counter products following record volumes at SwapClear.

The exchange said in its results statement: “There was no discernible change to customers’ use of the service as equivalence secured in event of hard Brexit.”

Last month the European Securities and Markets Authority said it would recognise the three UK central counterparties and the UK Central Securities Depository in the event of a no-deal Brexit.

Turner continued that first quarter revenues at LSE’s OTC derivative clearing business were 2% ahead of Berenberg expectations.

“This growth was not only faster than we expected, it was also broader: revenues from ancillary clearing services were 20% above our forecasts, while revenues from LCH’s treasury activities were 7% stronger,” he added. “Delivering this kind of growth against a tough cyclical backdrop (client clearing volumes were flat quarter-on-quarter in Q1) highlights the structural nature of much of the growth in LSE’s clearing activities.”

LCH also set records in the first quarter in EquityClear, CDSClear, ForexClear and RepoClear.

Turner explained that as a clearing house grows, its barriers to entry strengthen and its pricing power increases.

“LCH now clears £367 trillion of interest rate swaps, equal to 4.5x world GDP,” he added. “We approach the Q1 announcement of a £30m positive adjustment to LSE’s revenue-sharing agreement from this perspective, and view it as a demonstration of the pricing power that LSE is building.”

LSEG said in its results that LCH benefited from an updated SwapClear agreement with partner banks, with effect from the start of the year, which is estimated to deliver c.£30m savings to cost of sales this year.

Berenberg expects LSEG to grow earnings by 15% next year, while the strategic nature of the group’s assets is likely to provide downside protection from mergers.

Eurex

Deutsche Börse reported its first quarter results on 29 April and said secular net revenue increased by approximately 5%, in-line with the company’s plan.

Turner said in a report that the results were in line with consensus expectations due to help from a one-off gain. “With the group facing a mixed cyclical outlook, management’s efforts to accelerate growth inorganically assume a greater urgency, in our view,” he added.

Eurex said in a statement last month that the first few months of this year have been very successful for Eurex Repo with ten new clients since January and another ten buy-side clients in the process of onboarding.

“The cleared volume from buy-side clients has grown to almost €17bn since the beginning of quarter two,” added Eurex. “Those volumes will also be considered for the performance of banks that participate in the Repo Partnership Program.”

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