LSE/Brexit: clear and present danger
Purchase of Euroclear stake raises suspicion that it is insurance in case of catastrophe
Brexiters put the UK on a collision course with Brussels. Hours later, the London Stock Exchange buys a stake and a board seat at a big Belgian rival in financial infrastructure. It is maybe not such a coincidence.
Two years ago, the LSE’s hopes of combining forces with Deutsche Börse were blown apart by the Brexit vote. So the suspicion is that its €278.5m purchase of a near-5 per cent stake in Euroclear is insurance in case quitting the EU ends in catastrophe.
LSE denied such a motive. Euroclear is an important provider of trade settlement and custody services, Brexit or no Brexit. Managing collateral used in financial trades is a business growth opportunity when central bank bond purchases and tougher regulations are squeezing the supply of safe assets.
LSE also secured the stake at a reasonable price. Euroclear’s shareholders are mainly financial institutions — with an incentive to sell if that strengthens capital ratios watched by regulators. Euroclear is worth about €6bn, reckons UBS, based on comparisons with US peers. LSE’s deal valued it at €5.7bn.
The timing probably had much to do with internal LSE politics. US rival Intercontinental Exchange increased its Euroclear stake to 10 per cent almost a year ago. Back then, LSE was preoccupied by its search for a chief executive to replace Xavier Rolet, who quit in November 2017 amid a power struggle. But the deal at least looks defensive at a time when Brexit is straining Europe’s financial unity.
Tighter ties with a large eurozone partner can only help the LSE. It faces continental demands for euro-denominated instruments to be settled post-Brexit within the eurozone.
LSE bought Borsa Italiana in 2007. LCH, its clearing arm, has a Paris operation. Business could be diverted there. But much of the collateral held by LCH — €160bn in 2017 — is managed by Euroclear. Brexit is a leap into the great unknown. A seat on the Belgian company’s board will only help smooth the bumps.