LSE Tumbles Most in Three Years on EU Clearinghouse Rules

LSE Tumbles Most in Three Years on EU Regulations
Workers stand outside the London Stock Exchange Group Plc's headquarters in London. Photographer: Jason Alden/Bloomberg

London Stock Exchange Group Plc sank the most in three years after saying European Union regulations will cut income at its Italian central counterparty and may require LCH.Clearnet Group Ltd. to boost capital.

Europe’s oldest independent bourse tumbled 8 percent to 943 pence at the close in London, the biggest retreat since April 2009. The decline trimmed this year’s gain to 19 percent.

Recommendations published yesterday by the European Securities and Markets Authority proposed that 95 percent of a clearinghouse’s cash deposits placed with financial institutions must be collateralized with debt instruments meeting certain conditions regarding liquidity as well as credit and market risk, LSE said in a statement today. The rules, if implemented, will cut treasury income in fiscal 2014 while having no “material impact” in 2013 the London-based company said.

“This has the potential to significantly reduce the net interest income that LSE generates from its Italian clearinghouse,” Chris Turner, an analyst at Goldman Sachs Group Inc. in London, wrote in a report. He has a sell rating on the stock. Such revenue accounted for 14 percent of group sales in the six months ended March 2012, Victoria Brough, a spokeswoman for LSE, wrote in e-mailed comments today.

LSE earns money from taking margin or deposits from traders who use its Italian central counterparty, known as net interest income. The exchange holds the deposits, pays the depositors interest and receives an income by investing the funds for the short-term in the Italian interbank market.

Clearinghouse Capital

Members of clearinghouses, which act as central counterparties in derivatives contracts to spread the risk of default, will have to contribute a quarter of the institution’s capital reserves, ESMA said yesterday.

LSE agreed to buy a majority stake in LCH.Clearnet, Europe’s biggest clearinghouse, for 463 million euros ($599 million) in March to expand its post-trade services. LCH.Clearnet said in a separate statement today that it will need to boost capital by 300 million euros to 375 million euros to comply with the new regulations.

“You have a business that you are buying, a business you fought over on and now the business seems to need additional capital,” Peter Lenardos, an analyst at RBC Capital Markets in London, said in a phone interview today. “Hopefully they can go back and renegotiate the deal.”

Chief Executive Officer Xavier Rolet is trying to diversify LSE’s business away from traditional equities after losing market share to alternative trading systems. LSE scrapped a bid for TMX Group Inc., the operator of the Toronto stock exchange, last year after failing to win support from the Canadian company’s shareholders.

Rolet was awarded the maximum bonus of 1.52 million pounds ($2.47 million) last year for “excellent performance, resilient leadership and the delivery of strong financial results.”

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