Clearing organisations the London Clearing House (LCH) and Paris-based Clearnet are to merge, creating what the partners say will be the biggest European central counterparty and leading to a significant reduction in the cost of cross-border trading in Europe. The partners say that the €1.2bn ($1.4bn) deal, which will be completed by the end of the year, subject to regulatory approval, should generate annual cost savings in the region of €35m by 2007.
David Hardy, CEO of LCH, will become chief executive of the merged entity and Patrice Renault, current chief executive of Clearnet, will become deputy chief executive.
The merger has been on the cards for almost three years and financial market participants hope it will help firms to create operational benefits and cost savings within their own businesses. Aside from cutting credit risk by becoming the counterparty to each side of the trade, a major advantage of the central counterparty mechanism is the ability for firms to use netting; settling the net difference of buy and sell orders each day instead of settling each individual trade. LCH.Clearnet, as the merged entity will be called, will enable firms to expand their existing netting arrangements.
Industry commentators say the deal has been delayed by disagreement over which body would regulate the new entity, as well as by the radically different business models of LCH, which is user-owned, and Clearnet, which is controlled by Euronext. Euronext shareholders, who will be giving up a profitable subsidiary (contributing 9% of the group’s Q1 operating profit), are to be given a €150m payout.
The London Stock Exchange’s reaction to the deal was lukewarm, as one of its main continental rivals will now own the majority share in its clearer, through both its Clearnet control and through Euronext.Liffe’s stake in LCH. The LSE says it is investigating “alternative clearing arrangements”.
Market participants, however, say that the tortuous negotiations have resulted in a relatively level playing field and pursue the industry ideal of a pan-European clearing house. “The ownership structure and voting rights have been carefully constructed to balance all the various interests and to make sure it is independent from stock exchanges and settlement platforms alike,” says one Paris-based clearing member.
Euronext.Liffe will be the largest shareholder, with 45.5%, but its voting rights have been capped at 24.9% by dividing its interest into 24.9% ordinary shares and 16.6% preference shares. The London Metals Exchange and the International Petroleum Exchange will hold 3.6% of the new entity combined, while 45.1% will be held by users and 9.8% by Brussels-based settlement organisation Euroclear.
