NYSE Euronext Chief Executive Officer Duncan Niederauer said he’s working with Markit Group Ltd. on a bid for LCH.Clearnet Group Ltd., owner of the world’s largest swaps clearinghouse.
“To sit here and deny interest would be ridiculous,” Niederauer said at a meeting today in Eschborn, Germany, with shareholders of Deutsche Boerse AG, which has agreed to purchase NYSE Euronext. “It’s a Markit proposal, and we are one of the parties.”
LCH.Clearnet said May 28 it has been approached about “some form of possible business combination.” It has also held talks with Nasdaq OMX Group Inc. (NDAQ) and London Stock Exchange Group Plc (LSE), said three people familiar with the matter who declined to be identified because the discussions are private. No decisions have been made, they said. LSE has said it’s not holding talks with LCH.Clearnet on a deal.
The banks that created over-the-counter derivatives in the 1980s are seeking control over how the $601 trillion market transforms under new regulations in the U.S. and Europe. The Dodd-Frank Act mandates that most swaps be processed by clearinghouses and that all trades are reported to data repositories. The European Union last month moved closer to adopting a clearing mandate for most interest-rate, credit-default and other swaps.
The NYSE Euronext involvement with Markit, which provides data on swap prices, is part of a reciprocal deal with the banks that own Markit to drive business to New York Portfolio Clearing, a U.S. venture by NYSE Euronext and the Depository Trust & Clearing Corp., according to two people familiar with the strategy. New York Portfolio Clearing is competing with CME Group Inc. for interest-rate futures trading and is expected to expand into swaps clearing in coming years, said the people, who asked not to be named.
Teresa Chick, a Markit spokeswoman, and Richard Adamonis of NYSE Euronext declined to comment.
Many of the same banks that own Markit have stakes in LCH.Clearnet, including JPMorgan Chase & Co. (JPM), Royal Bank of Scotland Plc and Goldman Sachs Group Inc., according to filings at U.K. Companies House and LCH.Clearnet’s board of directors.
NYSE Euronext’s NYSE Liffe U.S., the exchange partner with DTCC in the New York Portfolio Clearing venture, is partly owned by Goldman Sachs, Morgan Stanley (MS), UBS AG, Citadel LLC, Getco LLC and DRW Ventures LLC.
Clearinghouses such as LCH.Clearnet and Deutsche Boerse’s Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the harm from a trader’s default. The business is becoming more valuable amid firmer regulation of derivatives trading and a merger wave that has seen more than $20 billion of exchange takeovers announced in the last seven months.
LCH.Clearnet’s SwapClear began clearing interest-rate swaps traded between banks in 1999. As of March it had cleared more than $266 trillion in notional amounts of rate swaps, the company said at the time.
“Any exchange that hopes to be successful in the OTC arena will have to be flexible on governance and ownership,” Niederauer said today, sitting at the same table as Andreas Preuss, CEO of Deutsche Boerse’s Eurex, Europe’s largest derivatives exchange. “That’s a prerequisite for success in the OTC arena.” Eurex and NYSE Euronext have both failed to make headway in guaranteeing credit-default swaps.
NYSE Euronext, which agreed in February to combine with Deutsche Bourse to create the world’s largest exchange company, has said it will start clearing all its own trades in Europe, terminating its contract with LCH.Clearnet and joining Deutsche Boerse and CME Group Inc., which operate their own trade and post-trade services. The London Metal Exchange said yesterday it may start its own clearinghouse, severing its arrangement with LCH.Clearnet.
The agreement with Markit will have “no impact” on NYSE Euronext’s plans to self-clear some trades, Niederauer said today. The move for LCH.Clearnet is a strategy to enter swaps clearing and doesn’t change the company’s existing futures businesses, according to the people familiar with NYSE Euronext’s plans.
Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry. Markit is among the contributors of data that appears on the Bloomberg terminal. Bloomberg also runs Tradebook, a trading venue that competes with NYSE Euronext.
Markit owns pricing services and the most actively traded credit-swap indexes such as the Markit CDX North American Investment-Grade Index and the Markit iTraxx Crossover Index. Markit’s indexes account for more than one-third of all credit-default swaps traded. Credit-default swaps represent $28 trillion in notional value, according to the New York-based DTCC, which operates a trade information warehouse.