LCH.Clearnet in Talks to Buy Nasdaq’s Rate Clearinghouse

LCH.Clearnet Group Ltd. entered discussions to buy Nasdaq OMX Group Inc.’s International Derivatives Clearing Group LLC as the world’s largest interest-rate swaps clearinghouse seeks to expand in the U.S.

The companies have signed a non-binding agreement, London-based LCH said today in a statement. New York-based Nasdaq will become a shareholder in LCH.Clearnet, joining London Stock Exchange Group Plc, after the deal is completed, according to the statement. No financial terms were released.

LCH.Clearnet is seeking to expand its U.S. business in guaranteeing interest-rate swaps with its SwapClear clearinghouse. The service began processing interest-rate contracts traded between banks in 1999 and expanded to offer U.S.-based services in March 2011.

“This is all about making SwapClear a more attractive clearing venue in the U.S. for end users,” Richard Perrott, a London-based analyst at Berenberg Bank, said in a phone interview today. “This will make it easier to organize cross margining and capital offsets. IDCG has not been a huge success.”

New York-based IDCG, which opened in January 2009 for interest-rate swap futures, has struggled to capture market share. Nasdaq last year tried to buy a minority stake in LCH.Clearnet, with Chief Executive Officer Robert Greifeld seeking talks on how IDCG and LCH could work together.

Sale Options

“Investors won’t be surprised that Nasdaq has been considering sale options for this business initiative,” Niamh Alexander, an analyst at KBW Inc., wrote in a report today. “IDCG has not generated significant revenue as of yet and we estimate that this division has cost Nasdaq about $10 million, or $0.05 in earnings-per-share, annually to support.”

LCH.Clearnet is also in discussions to join NYSE Euronext’s venture to take on CME Group Inc. in interest-rate trading. SwapClear would add U.S. rate swaps to the types of trades accepted by New York Portfolio Clearing to lower margin costs, the companies said last month.

“This will facilitate that happening considerably,” Michael Davie, chief executive officer of SwapClear, said in an in a telephone interview today. “The way we are looking at this is a strategic move for LCH,” he said. “It’s about a long-term commitment to the U.S. market.”

More Complicated

SwapClear has guaranteed more than $686 billion of interest-rate swaps between dealer banks and their customers, it said in the statement today. CME Group, based in Chicago, had backed $393.7 billion in rate swaps as of April 6, it said earlier this month.

The new U.S. business “is going very, very well,” Davie said. “This is very much to complement the existing offering we have.”

While swaps between banks have been cleared since 1999 by SwapClear, doing the same for trades between banks and asset managers or hedge funds is more complicated, Davie said.

“The question is, ‘how will the buy-side come to clearing?’” he said. “In that, CME will be a major clearer, but not the only one.” He noted that LCH.Clearnet has cleared more customer trades than CME to date. “Our hope is this will up the ante,” he said.

CME Group spokesman Michael Shore didn’t immediately respond to a telephone message seeking comment.

Antitrust Clearance

Earlier this month, LCH.Clearnet shareholders backed the clearinghouse’s proposal to sell a majority stake to LSE, Europe’s oldest independent bourse, for 463 million euros ($610 million). They intend to complete the transaction by the fourth quarter, and the deal needs to be cleared by antitrust authorities. LCH attracted interest from Nasdaq and NYSE Euronext before agreeing to the LSE bid.

LCH.Clearnet appointed Ian Axe as chief executive officer last April to revamp the company after losing two CEOs in less than six years. LCH.Clearnet has seen its market share in equities eroded by new entrants even as regulators mandated more clearing to reduce financial risk.

Clearinghouses 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. They have become more attractive as regulators seek more central clearing of derivatives.

Portfolio Clearing

NYSE Euronext, the owner of the New York Stock Exchange, has a stake of about 9.1 percent in LCH.Clearnet and plans to stop using the venue to clear European securities and derivatives in 2013. A joint venture between NYSE and the Depository Trust & Clearing Corp., known as New York Portfolio Clearing, may include interest-rate swaps backed by the U.S. operations of LCH.Clearnet, the companies said last month.

SwapClear’s Davie declined to comment on the terms of the deal, other than that Nasdaq would become an LCH.Clearnet shareholder. It’s too early to say when the deal may move forward as the company is working on several other initiatives, he said.

“Having told the world what we have in process, we need to get our heads down and deliver on what we’ve promised,” he said.