€500 million sale of LCH.Clearnet’s European operations to be overseen by JP Morgan Cazenove

FinanceFeeds reported in September that the proposed merger between Deutsche Boerse and London Stock Exchange had been halted as an investigation had been opened by the European Commission into the effect on derivatives trading that such a joining of two major venues could have.

This represented the most recent in a long line of regulatory, government and corporate wrangling over the proposed deal since Deutsche Boerse began to show interest in proceeding with the £21 billion bid.

Certainly it is now evident that London will retain its 215 year old prestigious mainstay of exchange traded derivatives and listing venue for the world’s blue chip firms, however as the deal crumbles, London Stock Exchange is now seeking to sell the European division of its in-house clearing firm, LCH.Clearnet.

As described in our report at the end of September, the proposed merger has been highlighted by officials as presenting a possible threat to competition in several areas of the financial ecosystem, including clearing and derivatives trading, hence another byproduct would be the potential reduction of the total amount of collateral that they transact to LCH.Clearnet in London and Eurex, which is Deutsche Boerse’s clearing house.

According to research by the European Commission, a merger would create the world’s largest margin pool with a value of 150 billion euros, therefore could impede competition for smaller trading venues that rely on LCH.Clearnet as well as other firms that offer similar collateral settlement services.

On this basis, London Stock Exchange stated that it had begun considering selling LCH SA, which is the France-based European division of LCH.Clearnet in order to address proactively any anti-trust concerns.

LCH Group which holds the European subsidiary LCH SA is 57% owned by the London Stock Exchange, with the remainder being owned by other users of the service.

Today, what had been a mere consideration has now become a reality as JP Morgan Cazenove has been instructed to oversee the sale of LCH SA.

The sale of LCH SA is likely to return approximately 500 million Euros, and is an instrumental factor in any resuming of potential deal terms between London Stock Exchange an Deutsche Boerse, on the basis that JP Morgan Cazenove could bring forward the required level of competition for LCH SA, potentially aligning it with Euronext at its early post-acquisition stage.

As far as potential buyers of LCH SA are concerned, New York Stock Exchange owner Intercontinental Exchange, CME Group and Nasdaq – all of which are highly technologically advanced electronic listed derivatives marketplaces – are considered to be among the suitable US candidates.

The shortlist is also likely to be drawn from an international pool of companies including the Hong Kong stock exchange, the Singapore Exchange, Shanghai Stock Exchange and Moscow Exchange. Smaller European players such as Icap, Bolsa de Madrid, SIX Swiss Exchange and Euroclear are also considered possible suitors.

Euronext’s CEO has said the ground-breaking exchange deal would create a “virtual monopoly” and the governments of France, Netherlands, Belgium and Portugal – all countries in which Euronext owns the main stock exchange – have publicly voiced opposition to the merger and written to Brussels regulator the European Commission.

As far as the European Commission’s probe into the merger plans between London Stock Exchange and Deutsche Boerse are concerned, at the end of last week, the deadline for the conclusion of the European Commission investigation was being pushed back from 13 February to 6 March, at the request of the companies.

Despite this bureaucracy and dissent from existing European clearing firms and exchanes, the sale of LCH SA is being conducted largely to attempt to sway the European Commission in favor of allowing the London Stock Exchange and Deutsche Boerse to merge.

It is ironic that the concerns of Lord Myners and other senior London officials with lifelong careers in the exchange traded derivatives sector in the largest financial center in the world were ignored by Germany, and that it has taken a report by the anti-business and staunch socialist European Commission whose interests are anti-British to stifle a potentially harmful merger which would have placed the control one of London’s fine institutions in Frankfurt, which is absolutely nowhere on the world’s financial markets and electronic trading stage.

The potential price that LCH SA may be sold for has not been disclosed, however this shows that London Stock Exchange’s British clearing operations remain a priority, and rightly so.

Photograph: Royal Exchange Buildings, London. Copyright FinanceFeeds