LSE Plans French Clearing Unit Sale to Appease EU Regulatorsby and
EU flags concerns about combined clearing houses, derivatives
Regulators set a Feb. 13 deadline in a wide-ranging probe
London Stock Exchange Group Plc plans to sell its French clearing unit to win over European Union watchdogs scrutinizing the company’s acquisition by Deutsche Boerse AG. The companies are seeking to create Europe’s dominant exchange operator.
An LSE statement about the sale of LCH SA came immediately after the European Commission’s widely expected announcement that it’s opening a broad-ranging investigation into overlaps between the London- and Frankfurt-based companies. LSE is keeping its larger London clearing unit. Competition authorities set a Feb. 13 deadline for the probe.
Selling the French clearing business “might appease them on the clearing side, but it doesn’t address the other concerns,” said Jonathan Goslin, an analyst at Numis Securities Ltd. in London. “When you’re trying to combine two of the biggest exchange operators, you’re going to run into a lot of questions being asked.”
Clearing -- a key back-office function that acts as a firewall against defaulting traders -- is a major rationale for the $13 billion deal.
Deutsche Boerse has a massive futures-clearing business, while LSE is the majority owner of LCH, the world’s biggest clearer of swaps. The competition regulator also said it has concerns about markets for derivatives and short-term financing known as repo, as well as German stocks and exchange-traded funds.
“We must ensure that market participants continue to have access to financial market infrastructure on competitive terms," EU Competition Commissioner Margrethe Vestager said in the statement.
Euronext NV has complained that the deal between Deutsche Boerse and LSE would damage competition. Chief Executive Officer Stephane Boujnah has said his exchange company, which doesn’t own a clearinghouse, would consider buying some parts of the companies if regulators force them to sell assets.
“If some clearing assets are for sale, we’ll consider them, but obviously not at any price,” he said last week on Bloomberg Television.
This is the third time the German exchange group has sought to buy LSE since the turn of the century. The EU four years ago blocked plans by Deutsche Boerse and NYSE Euronext to create the world’s biggest exchange. Regulators said that deal would have created a near-monopoly in European exchange-traded derivatives.
Merging the companies’ clearing houses may harm other trading venues that depend on clearing by LCH and affect post-trade markets such as collateral management, settlement and custody services, the competition authority said.
Regulators will also examine international listing of non-European companies, dealer-to-dealer electronic trading of German government bonds, licensing of indexes including DAX, STOXX and FTSE Russell, trading and clearing of freight derivatives, settlement and custody services and information technology services.
Clearinghouses have been a focus this year following the U.K.’s decision to leave the EU. Since the Brexit vote, France and Germany have argued that euro-derivatives clearing should take place in an EU jurisdiction. LSE CEO Xavier Rolet has said moving those operations could put some 100,000 U.K. jobs at risk, and that New York, where it also operates a clearinghouse, would be the likely beneficiary.