LCH.Clearnet Group Ltd., the world’s biggest clearinghouse for swaps, said full-year profit rose 11 percent as it unveiled plans to expand the business.
Net income increased to 21.2 million euros ($28 million) in 2011 from 19.1 million euros the previous year, the London-based company said today in a statement. Net revenue advanced 10 percent to 391.4 million euros. LCH.Clearnet is working on a two-year strategic review to improve efficiency, Chief Executive Officer Ian Axe said on a conference call.
“We are implementing a transformational plan,” said Axe, who started in April. “We believe we have a good shot at becoming the global leader in over-the-counter clearing across asset classes.”
LCH.Clearnet is holding exclusive takeover talks with London Stock Exchange Group Plc, after earlier attracting interest from Nasdaq OMX Group Inc. and NYSE Euronext, which planned to bid in partnership with Markit Group Ltd.
After NYSE Euronext’s merger with Deutsche Boerse AG was blocked by regulators last week, the New York-based company’s chief executive officer, Duncan Niederauer, said there are other “assets” available, such as LCH.Clearnet and the London Metal Exchange.
“We are always willing to take calls,” Axe said today when asked about approaches from other bidders. “We are currently in negotiations with LSE and hope to announce something shortly.” He declined to comment on when the period for exclusive negotiations with LSE will expire.
Niederauer said today that his priority is now NYSE’s strategy for post-trade services. The exchange has a contract through 2013 with LCH for equity clearing and has started to look again at its future plans for clearing derivatives, Niederauer said on a call today.
“As far as LCH goes, I think it’s fair to say we’d obviously be very interested in what happens,” he said. “We own nearly 10 percent of the company. We have a board seat and we’re the enterprise’s largest customer. We think that the company has a great deal of potential under Ian Axe’s leadership.”
He declined to comment further on whether the exchange would bid for LCH.Clearnet.
Market Share Eroded
LCH.Clearnet, whose SwapClear service began clearing interest-rate swaps traded between banks in 1999, has seen its market share in equities eroded by new entrants. Its biggest customers, such as NYSE Euronext and the London Metal Exchange, are considering clearing their own trades and two chief executives have departed in less than six years.
The clearinghouse paid Axe, who joined from Barclays Plc, 1.53 million euros in 2011. That included 863,000 euros as “compensation for loss of benefits from previous employment,” today’s statement showed.
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 threat from a trader’s default. The businesses have become more valuable as regulators globally seek more central clearing of derivatives.
Yesterday, European Union officials and lawmakers brokered a deal on rules to force trading of some over-the-counter derivatives through clearinghouses to safeguard financial markets. The law will empower EU regulators to decide on types of derivatives that should be centrally cleared.
Exchange operators from New York to Frankfurt and Singapore have sought takeovers to augment equity businesses after regulation and automated trading eroded profit. Nasdaq, which dropped a bid for NYSE Euronext, is the majority owner of International Derivatives Clearing Group LLC, which opened in January 2009 for interest-rate swap futures.
The banks that created over-the-counter derivatives in the 1980s are seeking control over how the $601 trillion market changes under new regulations in the U.S. and Europe. The Dodd-Frank Act mandates that most swaps are processed by clearinghouses and that all trades are reported to data repositories.
LCH.Clearnet plans to start its ForexClear service this year for over-the-counter derivatives, Axe said today. Last year the agency cleared fixed-income transactions with a record face value of 152 trillion euros, an 11 percent gain from 2010. Eleven new members joined the clearinghouse last year, Axe said.
As regulators urge more clearing for derivatives, exchanges such as Deutsche Boerse, NYSE, Intercontinental Exchange Inc. 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.
LSE, which tried and failed to buy the Canadian exchange last year, lags behind its rivals in the clearing business.