LSE, Deutsche Börse eye French spin-off as part of deal
The French arm of the London Stock Exchange Group’s clearing house may be spun off as a concession to smooth a takeover of the UK group by Deutsche Börse, according to three people familiar with the matter.
In a bid to gain support from regulators and politicians for a deal, the LSE and Deutsche Börse are considering parting with Clearnet SA, a Paris-based group that clears equities and credit default swaps, these people said.
They added that the UK bourse is also considering shifting control of a London-based interest rate derivatives business at LCH.Clearnet to Eurex, a clearing operation run by Deutsche Börse.
Both the LSE and Deutsche Börse declined to comment.
LCH’s future is one of the outstanding issues that the LSE and Deutsche Börse would have to announce to the market in coming weeks if they formalise their deal.
The business, a mixture of separately regulated UK and French subsidiaries, clears derivatives and equities. The LSE owns only 58 per cent of LCH, with the balance owned by a consortium of banks.
Putting Clearnet SA under the control of a Eurozone based business would be an attempt to allay concerns about its regulation if the UK votes to leave the European Union later this year. It would keep the euro-dominated business under the supervision of the European Central Bank.
Clearnet in France operates under a banking licence. It merged with the London Clearing House more than a decade ago but the two businesses are not fully integrated.
The unglamorous business of clearing trades has shot to the forefront of global regulators’ efforts to underpin markets against systemic risk.
Banks and large users such as hedge funds and asset managers, put up billions of dollars in margin as insurance for their trades and leave the money in clearing houses.
The LSE and Deutsche Börse also said last week that their deal would have “significant customer benefits”, including reducing margin costs by netting them within one organisation.
This would involve moving the LSE’s interest rate derivatives business subsidiary SwapClear into Deutsche Börse’s Eurex futures business and use the German group’s technological platform.
SwapClear, as the world’s largest clearer of interest rate derivatives, has emerged as one of the winners from the financial crisis. By merging it with Eurex, it would ease banks’ growing capital requirements by allowing them to net their margin payments for futures and swaps trades.
The LSE and Deutsche Börse aim to press on with a deal in spite of potential counterbids from US duo Intercontinental Exchange (ICE) and Chicago’s CME Group. On Tuesday, ICE indicated its interest but added that no approach had yet been made.
Other parts of LCH.Clearnet, including clearing services for foreign exchange swaps and repo markets, remain undecided but could potentially be included in Clearnet SA in order to smooth the path with regulators and gain political approval in Paris, the people close to the situation said.
A sale of Clearnet would likely interest Euronext, the Paris-based stock exchange that also owns the Amsterdam, Brussels and Lisbon bourses. Euronext was unavailable for comment.