LCH.Clearnet May Be Next Front in Exchange Consolidation

The world’s biggest clearinghouse for swaps is attracting interest from the world’s highest-profile operators of equities exchanges.

LCH.Clearnet Group Ltd. said today it has been approached about “some form of possible business combination.” It has held talks with Nasdaq OMX Group Inc., NYSE Euronext and London Stock Exchange Group Plc as part of a strategic business review, according to three people familiar with the matter. No decision has been made on any potential sale, said the people, who declined to be identified because the discussions are private.

Clearinghouses such as LCH.Clearnet and Eurex Clearing operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the risk that a trader defaults on a deal. 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.

“It makes logical sense for the exchanges to go after this,” said Tim Hartzell, who oversees about $350 million as chief investment officer for Houston-based Sequent Asset Management. “There’s a regulatory push to move the business off the banks’ balance sheets and into clearing houses and exchanges.”

NYSE, Nasdaq

The LSE said in an e-mailed statement today that the group isn’t in discussions with LCH about a possible transaction. NYSE Euronext spokesman Ray Pellecchia and Alex Honeysett, a spokeswoman for Nasdaq OMX, declined to comment.

“LCH.Clearnet confirms that it has received various proposals indicating an interest in pursuing some form of possible business combination or other cooperation,” Andrea Schlaepfer, a spokeswoman for LCH, said in a statement today. “LCH.Clearnet’s considerations are at a preliminary stage and there can be no certainty that these proposals will result in any transaction.”

Exchange operators from New York to Frankfurt and Singapore have sought takeovers to augment core stock trading businesses after regulation and computers eroded profits. Nasdaq OMX withdrew from a bidding contest for NYSE Euronext this month after U.S. regulators indicated they would block its $11.3 billion hostile offer.

“This is especially attractive for Nasdaq if they can diversify and start crossing time zones and country borders, especially after they walked away from the New York Stock Exchange deal,” Hartzell said.


The U.S. Dodd-Frank Act mandates that most interest-rate, credit-default and other swaps be processed by central counterparties and traded on exchanges or similar systems, taking business from the Wall Street banks that pioneered the transactions. All OTC trades will be reported to regulators, while dealers and their biggest clients will face higher capital requirements to access the market. In Europe, regulators are also mandating more clearing of OTC derivatives.

NYSE has said it will start clearing all its own trades in Europe, terminating its contract with LCH.Clearnet and joining Deutsche Boerse AG, with whom it agreed in February to combine, and rival CME Group Inc., which operate their own trade and post-trade services.

Nasdaq OMX, NYSE Euronext and LSE proposed paying between 350 million euros ($500 million) and 1 billion euros for the company, the Financial Times reported yesterday, citing three sources it didn’t identify.

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