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LCH Buys IDCG, U.S. Swaps Clearinghouse, From Nasdaq

LCH.Clearnet Group Ltd. bought International Derivatives Clearing Group LLC from Nasdaq OMX Group Inc. and other investors, seeking to expand in the U.S.

London-based LCH.Clearnet acquired IDCG by issuing shares at 19 euros each to Nasdaq, LCH said in an e-mailed statement today. The deal allowed the U.S. exchange operator to take a 3.7 percent stake in the world’s biggest interest-rate swaps clearinghouse.

“We wanted to make a bigger commitment to the U.S. marketplace,” Ian Axe, chief executive officer of LCH, said in an interview today. “We felt a domestic central counterparty would complement our international model well. We know the imminent Dodd-Frank regulation is looking to promote increased clearing activity” through central counterparties.

The two companies signed a non-binding agreement in April. New York-based IDCG, which opened in January 2009 for interest-rate swap futures, has struggled to capture market share. LCH.Clearnet is seeking to expand its U.S. business in guaranteeing interest-rate swaps with its SwapClear clearinghouse even as the U.S. Dodd-Frank Act mandates more processing of trades.

Deal’s Value

LCH.Clearnet had 36.1 million shares outstanding as of April 3, when shareholders backed the clearinghouse’s proposal to sell a majority stake to LSE, Europe’s oldest independent bourse, for 463 million euros. Based on this data, a 3.7 percent stake would amount to 25.8 million euros, according to Bloomberg calculations.

According to Berenberg Bank calculations, at the end of 2011, LCH.Clearnet had about 40.6 million shares outstanding and a 3.7 percent stake would amount to about 30 million euros. LSE is also paying 19 euros a share for its planned acquisition of a majority stake in LCH.Clearnet.

LCH CEO Ian Axe declined to comment on either the number of shares outstanding or the valuation as did Robert Madden, a spokesman for Nasdaq in New York.

Nasdaq follows London Stock Exchange Group Plc, which it has failed to buy at least three times, as an LCH.Clearnet shareholder. 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.

‘No Volume’

IDCG has cost Nasdaq about $10 million, or 5 cents in earnings per share annually, Niamh Alexander, an analyst at KBW Inc., said in April. In June, Nasdaq said it plans to start an interest-rate derivatives trading platform in London, competing directly with NYSE Euronext and Deutsche Boerse AG.

IDCG struggled to attract business, according to Chris Allen, an analyst with Evercore Partners Inc. in New York who covers Nasdaq. A potential benefit for LCH.Clearnet may be the connections IDCG has to U.S. customers, Allen said. He stopped tracking how many contracts the clearinghouse processed a few months ago, he said.

“We stopped because there’s been no volume,” Allen said, adding that, for Nasdaq, it will free $75 million in regulatory capital the company had to hold against the rates clearing business. “Once it’s bought by someone else that cash is free to use as they see fit,” Allen said.

LCH.Clearnet’s SwapClear clearinghouse service began processing interest-rate contracts traded between banks in 1999 and expanded to offer U.S.-based services in March 2011.

“This is a sensible move to support the budding U.S. business ahead of Dodd-Frank adoption by the buy side,” said Richard Perrott, exchange analyst at Berenberg in London. “I can see why this is a good deal for SwapClear. I’m not sure why this is a good deal for LCH.Clearnet.”

Profit Sharing

LCH.Clearnet shares SwapClear’s profits with the major banks via OTCDerivnet, according to Berenberg. The profit-sharing arrangement involves the first 5 million pounds of profit staying with LCH.Clearnet while the next 5 million pounds is split equally between OTCDerivnet and LCH.Clearnet, Berenberg’s Perrott said. Any additional profits are split with 85 percent accruing to OTCDerivnet and 15 percent to LCH.Clearnet, he said.

The U.K.’s antitrust regulator is now scrutinizing the LSE-LCH deal, which both companies intend to complete by the fourth quarter. LCH attracted interest from Nasdaq and NYSE Euronext before agreeing to the LSE bid.

LCH.Clearnet appointed Axe as CEO in April 2011 to revamp the company after losing two CEOs in less than six years. LCH has seen its market share in equities eroded by new entrants even as regulators mandated more clearing to reduce 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.

NYSE Euronext, the owner of the New York Stock Exchange and LCH.Clearnet’s biggest customer, plans to stop using the venue to clear European derivatives.

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