LCH.Clearnet Seeks Cost Savings After Purchase by LSE

LCH.Clearnet Group Ltd. has room to cut costs in technology and overlapping systems after London Stock Exchange Group Plc purchased a majority stake in the clearinghouse, its chairman said.

“There are big opportunities around optimizing IT development,” Jacques Aigrain, chairman of LCH, said in an interview at the Buergenstock conference organized by the Futures Industry Association and the Swiss Futures & Options Association in Geneva. “We are a big spender in terms of capital expenditure, for example, with complex derivatives projects. Hopefully there is an opportunity now to do this better to benefit the users and shareholders.”

The two companies also have areas of overlap where costs can be cut, such as in support functions, Aigrain said, declining to be more specific. The “full benefits of integration will emerge over three years,” he said.

LSE owns 57.8 percent of the London-based clearinghouse after completing the acquisition in May. Nasdaq OMX Group Inc. increased its stake in LCH to 5 percent from 3.7 percent as part of the deal, which valued LCH.Clearnet at 633 million euros ($858 million).

“We want to make LCH more efficient,” Aigrain said. “For legacy reasons it’s an accumulation of different systems, and there’s complexity of design and interaction of systems. Because of this legacy, the expenditure is heavy compared to what it could be.”

Collecting Collateral

Clearinghouses cut risk by collecting collateral to back each transaction, monitoring daily price moves and making traders put up more cash as losses occur. Traders have to deal through clearing members, who are typically the biggest banks and brokerages.

Clearing venues such as LCH and those run by CME Group Inc., IntercontinentalExchange Inc., the Depository Trust & Clearing Corp. and the Options Clearing Corp. have grown more important to the financial system as regulators globally push more trades through them.

LCH has said it will seek new business from swap futures, over-the-counter contracts and client clearing. Clearinghouses and exchanges plan to benefit from a trend to turn swaps into futures contracts, known as futurization.

“The exciting part is that we are in a part of the market where there is growth,” Aigrain said. “There has been significant growth, double digit, in OTC. Regulatory reform is creating a growth environment.”