LSE Confirms Interest In Clearing House
Monday, September 05, 2011

The London Stock Exchange (LSE) is in the early stages of negotiations on a bid to acquire a majority stake in Europe's only independent clearing house.

It was widely reported on September 1 that the LSE had made a bid to acquire control of LCH.Clearnet, pitting it against the post-trade services group Markit, which placed an offer earlier in the year, and Nasdaq OMX, which has also been linked with a takeover of the clearing house. LCH.Clearnet is used by the LSE for the purpose of clearing UK stocks and 83% of it is owned by bank and broker customers.

LCH.Clearnet is the leading independent clearing house group, serving major international exchanges and platforms, as well as a range of OTC markets. It clears a broad range of asset classes including: securities, exchange traded derivatives, commodities, energy, freight, interest rate swaps, credit default swaps and euro and sterling denominated bonds and repos.

As a clearing house, LCH.Clearnet sits in the middle of a trade, assuming the counterparty risk involved when two parties (or members) trade. When the trade is registered with LCH.Clearnet, it becomes the legal counterparty to the trade, ensuring the financial performance; if one of the parties fails, LCH.Clearnet steps in. By assuming the counterparty risk, LCH.Clearnet underpins many important financial markets, facilitating trading and increasing confidence within the market.

The LSE confirmed on September 2 that it is "currently in discussions with LCH.Clearnet regarding a possible transaction", with talks at an early stage. Were the deal to go ahead, it would value the clearing house at around GBP900m (USD1.5bn).

This is the second major transaction the LSE has attempted to make this year as it bids to expand its business in response to consolidation in the stock exchange sector. In 2007, NYSE Group completed its takeover of Euronext to create the world's largest exchange group, and earlier this year, NYSE Euronext and Deutsche Boerse announced that they had agreed to a merger deal. Unlike other exchanges, the LSE also does not own its own clearing operation.