March 2, 2012 / 10:58 AM / 6 years ago

NYSE will gain whatever LCH.Clearnet outcome

LONDON (Reuters) - Transatlantic stock exchange NYSE Euronext NYX.N stands to gain whether or not its rival the London Stock Exchange (LSE.L) snatches up hotly contested clearing house LCH.Clearnet - given that NYSE is LCH’s biggest shareholder.

LSE Chief Executive Xavier Rolet entered exclusive talks to buy LCH.Clearnet, the bourses’s main clearing provider, in September.

But analysts have argued NYSE should look afresh at LCH after its planned merger with Deutsche Bourse collapsed last month, and speculation mounted this week with the LSE seemingly no closer to a deal as its LCH talks entered their sixth month.

NYSE could use its powerful position as a 9-percent shareholder in LCH.Clearnet to stall the LSE deal, to muscle in on it, or to take the money from a sale and use it to set up its own rival clearing business.

“Given NYSE Euronext is LCH’s largest shareholder, it would be crazy to think they have not looked at the LCH,” said Peter Lenardos, analyst at RBC Capital Markets.

Both exchange groups have seen recent merger attempts collapse: Deutsche Boerse’s bid for NYSE Euronext failed in February when it was blocked by European competition regulators, and the LSE’s attempt to scoop up Canadian peer TMX collapsed last year after shareholders nixed the deal.

The terms of the LSE’s bid for LCH have not been disclosed, but it was reported to be offering 1 billion euros ($1.34 billion) for 51 percent of LCH - or 21 euros a share - nearly double a bid by data vendor Markit of 12 euros a share.


Clearing houses sit between trading firms, acting as a central counterparty that reimburses companies on losses resulting from the default of a trading partner, like Lehman Brothers in 2008 or MF Global in 2011.

Regulators’ efforts to make trading safer have made clearing a fast-growing business, and it is no longer the stolid corner of the market it once was perceived as.

“I can see why the LSE wants to complete the LCH deal as quickly as possible and NYSE needs to do something on the clearing side,” said Simmy Grewal, a senior analyst at research house Aite Group.

A source familiar with the situation said that NYSE was not in talks with LCH but a possibility might be a strategic alliance should LCH’s talks with LSE fail, this person said.

A NYSE move on LCH would be a blow for the LSE’s Rolet who wants to get a deal done to rebuild credibility after TMX Group.

A spokeswoman for the LSE said: “The Group remains actively engaged in exclusive discussions with LCH.Clearnet regarding a potential transaction.”

NYSE declined to comment.

One of the main challenges for Rolet is winning over LCH’s 98 shareholders, comprising the region’s top banks, smallest commodities brokers and NYSE Euronext.


    If NYSE decides to sell out to LSE, it might well invest the 90 million euros it would receive as a result to develop its own clearing business, an area NYSE Euronext Chief Executive Duncan Niederauer is keen to develop.

    It said last year it planned to stop using LCH.Clearnet in June 2013 for clearing futures, and December that year for equities, while the LME said in December 2011 it aimed to start self-clearing - where the exchange clears for itself rather than using a third party provider like LCH.Clearnet - within two years.

    NYSE Euronext and the LME’s departure would potentially make the LCH less valuable, which makes it harder to price, according to analysts.

    “Limited disclosure and radical changes to LCH.Clearnet’s business model make it extremely difficult to value,” said Richard Perrott, an analyst at Berenberg Bank.

    Perrott estimates the LCH to be worth about 17 euros per share, well below the reported LSE bid.

    LCH is also likely to face competition from new entrants who are keen to tap regulatory reforms to force the over-the-counter markets to use clearing, which could affect LCH’s market-leading Swapclear unit.

    And even if Rolet does get the deal done, he will still have to answer to LSE shareholders who will be watching the exchange’s future earnings closely for signs that he was right to pay over the odds for LCH.Clearnet.

    Lenardos said: “LCH.Clearnet makes long-term strategic sense for the LSE but it’s impossible to make a call at this stage whether this a good deal.”

    ($1 = 0.7476 euros)

    Additional reporting by Paritosh Bansal in New York, Editing by Douwe Miedema and Jodie Ginsberg

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