LSE Set to Close on LCH.Clearnet

Terry Flanagan

The deal for the LSE to acquire prized clearinghouse LCH.Clearnet inches closer to completion after shareholders from both voted overwhelmingly to approve the deal.

The London Metal Exchange, the world’s biggest metals bourse, may get as much as $54 million from the partial sale of its stake in LCH.Clearnet, according to reports. The LSE is set to pay about $611 million for a 60% stake in the clearinghouse. 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 at a meeting earlier this week while 94.3% of LCH shareholders gave their approval at a separate meeting. 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.

“This will definitely make the LSE a bigger player in Europe,” said Michael Wong, an analyst with Morningstar. “The landscape in Europe will be much more competitive. With every passing year, the European capital markets landscape looks more like the U.S., and the U.S. looks almost perfectly competitive,” he added.

“It will give them an advantage in OTC swaps,” noted Wong. “Taking over LCH.Clearnet would let them fill in a capability they currently don’t have.”

The offer, which implies a total value for London-based LCH.Clearnet of over $1 billion, 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.

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.

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.

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.

The London Metal Exchange is itself being courted by a host of potential acquirers, with CME Group, NYSE Euronext, IntercontinentalExchange and Hong Kong Exchanges and Clearing on the shortlist, according to reports. All four suitors are in the process of conducting due diligence leading up to the May 7 deadline to make offers in a second round of bidding. Industry analysts have estimated the deal could be worth as much as $1.6 billion.

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