Nasdaq OMX Group Inc. is seeking a minority stake in LCH.Clearnet Group Ltd., Nasdaq Chief Executive Officer Robert Greifeld said.
The New York-based exchange is in discussions with LCH.Clearnet as part of a strategy to expand beyond the U.S., Greifeld said in an interview at the Federation of European Securities Exchanges annual convention in Athens. Nasdaq, which dropped a bid for NYSE Euronext, is the majority owner of International Derivatives Clearing Group LLC, opened in January 2009 for interest-rate swap futures.
“Calling it a bid is a little strong,” Greifeld said. “There’s a discussion also on how IDCG can work with LCH. We are having conversations with many people including some in the room. It’s my job to ensure we do that.”
LCH.Clearnet, the world’s largest swap clearinghouse, said May 28 it has been approached about “some form of possible business combination.” It has also held talks with London Stock Exchange Group Plc (LSE), said three people familiar with the matter who declined to be identified because the discussions are private. LSE has said it’s not holding talks with LCH.Clearnet on a deal.
LCH declined to comment on interest from Nasdaq, said Rachael Harper, a spokeswoman for the London-based company. Nasdaq shares rose as much as 28 cents, or 1.2 percent, to $24.01 and were up 19 cents at $23.92 at 11:24 a.m. in New York.
NYSE Euronext Chief Executive Officer Duncan Niederauer said June 1 that he’s working with Markit Group Ltd. on a bid for LCH.Clearnet, owner of the world’s largest swaps clearinghouse.
Nasdaq withdrew its unsolicited offer for NYSE Euronext, the exchange operator that agreed to sell itself to Frankfurt-based Deutsche Boerse AG, after the U.S. Department of Justice threatened to block the bid. The NYSE Euronext bid was made in conjunction with Atlanta-based IntercontinentalExchange Inc. (ICE)
“We always consider opportunities where we can deliver value to shareholders,” Greifeld said in the interview. “Our view is there are a number of different assets and asset classes and we are looking at them. NYSE has never been part of our strategic plans.”
Greifeld said he wouldn’t have done anything differently.
“We went into it knowing the DOJ would have questions,” he said. “We are disappointed but that’s a risk we took, we are happy we did it. I’m thankful to them for responding in such a rapid way.”
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.
“The benefit is theoretical and best done when done under the same regulatory body,” Greifeld said in a speech at the FESE convention today. “We actually believe the pace of change happens at a glacial pace. You engage in dialogue with many and have serious conversations with a few.”
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.
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.
Nasdaq’s potential deal with LCH “could take many forms,” Greifeld told reporters after his conference speech. “We are interested in both the over-the-counter clearing and cash equities. IDGC is a natural fit.” The exchange is open to joining with others in a bid for an LCH stake, he said.
As regulators urge more clearing for derivatives, exchanges such as Deutsche Boerse, NYSE, LSE, ICE and CME Group Inc., which own clearinghouses or have the so-called vertical model that locks in trading and post-trading, are offering more services. The banks that dominate the market are seeking to take stakes in clearinghouses or strike profit-sharing agreements.
Vertical vs. Horizontal
“There’s a future for the horizontal model,” Greifeld said in the interview. “We see a lot of firms in the industry going vertical but we support horizontal clearing as a concept.”
Exchanges worldwide are seeking to consolidate to counter competition. LSE and TMX Group Inc., owner of the Toronto Stock Exchange, announced plans to combine on Feb. 9. A group of nine Canadian banks and pension funds submitted a rival offer in May. TMX was in talks with a third potential bidder last year before reaching an agreement with LSE.
TMX was approached by the unidentified, “significant” company in the exchange industry 15 months ago, according to a filing. TMX held talks with Nasdaq OMX in 2010 but ended discussions because of concern the U.S. company would have too much control over the combined entity, the Globe and Mail said Feb. 18.
Designs on LSE
Negotiations with the unidentified company ended in June 2010 and resumed in September, focusing on whether a deal would satisfy a law requiring cross-border takeovers to provide benefits to Canadian interests, according to filings. Talks were discontinued on Nov. 3 and terminated on Jan. 25.
Greifeld has twice tried and failed to buy LSE, both times taking his offer directly to shareholders after he was rebuffed by Clara Furse, then chief executive of LSE.
Asked today whether he’s interested in combining with LSE or TMX, Greifeld replied: “As I said: we talk to many people. We have serious conversations with a few. They would have to fall into the ‘many’ category.”
“We always want to do a friendly deal,” he said.
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