Clearing houses in UK and US agree link
By Jeremy Grant
well there is one good thing about this contraction, centralizing everything on one world market. The closer these two organizations come to merging would mean that we get faster clearing of transactions between the US and Europe. That means cheaper and broader access to each others markets for everyone. I'm sure that as it stands right now. the intermediaries on these transactions are getting killed in this highly volatile market.
Published: October 22 2008 20:24 | Last updated: October 22 2008 20:24
Consolidation of the back-office industry that underpins most stock and derivatives trading took a big step forward on Wednesday when The Depository Trust & Clearing Corporation of the US and Europe’s LCH.Clearnet signed a preliminary agreement to combine their businesses.
The deal – if consummated as expected by early next year – promises to deliver significant cuts to the overall cost of trading multiple kinds of assets, ranging from shares to derivatives.
It would create the world’s largest clearing house and the first transatlantic one.
The plan comes as the role of a clearing house and settlement systems have been thrust to the forefront of regulators’ concerns amid the financial crisis.
A clearing house stands between two parties to a trade and protects against one of the parties being unable to pay in the case of default.
Under the proposed deal – codenamed Bicycle – DTCC will take over LCH.Clearnet by acquiring, over a three-year period, all of the European clearer’s ordinary shares. LCH.Clearnet shareholders will receive up to €10 a share, funded by LCH.Clearnet’s revenues over the period, implying a value for LCH.Clearnet of €739m (£574m).
LCH.Clearnet is owned 73.3 per cent by investment banks, brokers and other market participants, 10.9 per cent by exchanges, including Euronext, and 15.8 per cent by Euroclear, Europe’s largest provider of settlement services.
The combined group will cover equities, fixed-income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and over-the-counter products such as interest rate swaps, credit default swaps, carbon emissions and freight contracts.
Clients served globally would include several thousand broker-dealers, banks, institutional investors, hedge funds, trust companies, mutual funds and insurance carriers and other third parties that market financial products.
DTCC offers clearing and settlement of almost all US equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives.
Don Donahue, its chief executive, said the deal would create “very meaningful synergies between the two organisations” so both could “take costs for clearing in our respective markets down further”. The US and Europe would for the first time, be “supported by a common infrastructure”.
Merrill Lynch advised LCH.Clearnet, while Goldman Sachs acted for DTCC.
On Wednesday Eurex, the derivatives arm of Deutsche Börse, was among exchange and clearing groups meeting Charlie McCreevy, EU internal markets commissioner.
Copyright The Financial Times Limited 2008
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