“We won’t pay one penny!” says Euronext as LSE’s desperation to sell LCH’s Euro division for £430 million becomes apparent

As pressure to conclude the proposed merger between London Stock Exchange and Deutsche Boerse continues, Euronext steps in as the most suitable acquiring party, however despite a £430 million valuation, Euronext has made it clear that it will not pay one penny. The question is, will LSE let LCH SA go for free in order to get on with the Deutsche Boerse merger deal?

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Capitalizing on a specific situation and the necessity for a large corporation to sell part of its operations is perhaps an apt way to describe Euronext’s proposed takeover of LCH SA, the European division of London-based LCH.Clearnet which is owned by London Stock Exchange.

LCH is a large multi-asset class clearing house, serving a broad number of major exchanges and platforms as well as a range of OTC markets, its London operations being a mainstay of the OTC clearing ecosystem, however in the approach to the fraught proposed merger between Deutsche Boerse and London Stock Exchange, so much legal wrangling, political discourse and concerns from both Germany and England’s leading figures has resulted in a full investigation by the European Commission into the details of the merger having been launched.

FinanceFeeds reported that as a result of 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 that basis, London Stock Exchange’s response was to make a quick attempt to sell LCH SA 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.

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 desperation that has now come about has been sensed by Euronext, which is one of the key suitors for the purchase of LCH SA, for which London Stock Exchange wants £430 million, and has to sell it in order to put paid to the investigation into any potential anti-competitive nature of the proposed deal, and quite frankly to just get on with it.

In late October, JPMorgan Cazenove was enlisted to oversee the sale of LCH SA, and all looked set to head to market and find a suitable acquirer, with Euronext being in the lead because it contributes around half of the revenue of LCH SA in clearing business from France, Holland, Portugal and Belgium.

Euronext appears to realize its position of strength in that it is strategically and operationally the most suitable acquiring party, and the shortlist of alternatives that would buy LCH SA is dwindling, however, Euronext has made it clear that it will not pay one penny for LCH SA.

It is possible that British interdealer broker ICAP may make a bid, and it is also possible that European exchanges such as SIX Swiss Exchange or Bolsa de Madrid may make a bid, and some venues in the Asia Pacific region including Hong Kong’s stock exchange, Shanghai Stock Exchange or Singapore Exchange may be in the frame, however concluding a deal with any is likely to be far more long and drawn out than to hand it to Euronext, and a long drawn out affair would impede London Stock Exchange and Deutsche Bank’s merger plans substantially.

There has been no conclusion as to whether Euronext will have any chance of acquiring what has been valued as a £430 million dollar enterprise that is a mainstay in European clearing for nothing, however it is not entirely impossible.

London officials have revealed serious reservations regarding the way that the merger discussions were conducted, and the potential modus operandi of the entity post-merger.

In particular, Lord Myners, along with senior regulators in London, have concerns relating to how clearing operations can be expanded across both exchanges.

According to laws in America and Europe, notably the Dodd-Frank Wall Street Reform Act and the EMIR (European Market Infrastructure Regulation), exchange-traded swap contracts must be cleared through specific electronic clearing houses, a process which engenders greater transparency and in the case of London Stock Exchange, its own subsidiary LCH.Clearnet is used for this purpose.

The case in point here is that nowadays, with large banks better capitalized, transactions are now being passed to institutions with very little capital at all therefore if large trades went wrong, there could be massive exposure, and as a result, a question mark hangs over the corporate governance of a new entity consisting of the London Stock Exchange and Deutsche Boerse with its head offices in two separate countries, which could lead to a shirking of responsibilities by British and European regulators, or a degree of buck-passing. Counterparty risk is, after all, a very important subject post SNB EURCHF peg removal.

The incumbent Chairman of the Treasury Select Committee Andrew Tyrie is on the fence regariding the potential British exit from the European Union, however he has been vocal regarding the standardized EU regulations across all industry sectors, stating that there is absolutely no reason to fear a standard EU ruling on all industry matters. Indeed, Mr. Tyrie’s perspective on this matter is evident here, as he does not fear the potential difficulties which could arise from a merger between Britain and Germany’s flagship traditional exchanges, as it would appear to be manageable via standardized regulation.

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