LSE Eyes Clearing Riches
The London Stock Exchange has agreed to buy a majority stake in LCH.Clearnet, which will give the U.K. venue access to the lucrative clearing market.
The offer, which implies a total value for London-based LCH.Clearnet of €813m, is the culmination of many months of talks between the two parties.
LCH.Clearnet, which is Europe’s last remaining independent clearer, is the world’s biggest swaps clearing house. While the LSE, which has made several moves to acquire the clearer in the past 12 months, is unusual among many European venues in that it lacks its own clearing house for its main share market.
Clearing house ownership allows an exchange to collect fees that would otherwise go elsewhere. Currently, the LSE outsources clearing on its share venue to LCH.Clearnet. And with declining share revenues for bourses, clearing house ownership is increasingly important as exchanges go in search of extra fees.
The deal, which comes just a year after the LSE’s failed bid to acquire Canada’s exchange operator TMX Group, will boost the London bourse’s post-trade business.
“This landmark transaction for the LSE Group is a rare opportunity at a critical time of development in market infrastructure, regulatory change and evolving customer needs,” said Xavier Rolet, chief executive of the LSE Group, in a conference call today. “This gives us access to global clearing opportunities and empowers the group to offer new products to innovate and provide a more competitive environment for listed derivatives.”
The move comes as new regulation emerging from the European Commission on forcing over-the-counter derivatives on to exchanges through its European Market Infrastructure Regulation, due to be enforced in the second quarter of next year, is making clearing houses a more attractive proposition as regulators globally seek a more central model of clearing for derivatives to safeguard the financial system against large defaults.
The LSE has been in aggressive mode in the past few years, looking to expand its business. It has tried to attract foreign companies from across the globe to list in London, as well as buying rival European exchange Turquoise, a multilateral trading venue, and Sri Lankan technology provider MillenniumIT.
“This deal broadens the income profile of the LSE and builds scale amongst the consolidating world of exchanges,” wrote James Hamilton, an analyst at UK investment bank Numis Securities in London, in a report today. “All of the major banks will remain shareholders post deal which is likely to make them inclined to continue to provide LCH with business.”
LCH.Clearnet is 83% owned by banks and brokers, with the rest divided up between U.S. stock exchange operator NYSE Euronext and the London Metal Exchange, the world’s largest metals futures market.
Completion of the LSE-LCH.Clearnet tie-up is expected by the end of the year and is subject to regulatory and other approvals, including anti-trust clearance, according to the two companies.
Ian Axe, chief executive of LCH.Clearnet, said: “Transforming LCH.Clearnet into a best in class international CCP [central counterparty clearing house] will be accelerated by the partnership’s enhanced capabilities. We see significant revenue opportunities opening up as a result of both customer and regulatory demand for more efficient and more sophisticated tools to manage market risk.”
Clearing houses sit between trading firms and act as a central counterparty by collecting and maintaining margin money between the trading firms. They then reimburse companies on losses resulting from the default of a trading partner.
Phase 5 of the uncleared margin rules (UMR) took effect from September 2021.
Temporary equivalence is set to expire on June 30 2022.
IRS trading volumes have fragmented without an equivalence agreement.
Phase 5 of the uncleared margin rules came into effect on 1 September.
Triparty repos can be executed across U.S. Treasury securities to central clearing.