04 Feb 2009, Alastair Marsh, Risk magazine
On Monday, interdealer broker Icap confirmed it is "an equal member of a consortium of a number of leading financial institutions" - rumoured to include Société Générale, which declined to comment - that may place a cash offer for LCH.Clearnet and break up a non-binding merger agreement made on October 22, 2008 between the UK clearing firm and DTCC.
The European clearing house has not yet received any formal offer from the consortium and the discussions are said to be at a preliminary stage. However, any proposition would need to be greater than the price agreed with the DTCC, which gave an implied equity value for LCH of €739 million, or up to €10 a share.
Under the terms of the proposed DTCC-LCH merger, scheduled to close on March 15, 2009 following a due diligence process, the US clearer will receive 100% of the ordinary shares of LCH.Clearnet, forming a US-governed transatlantic juggernaut in the clearing space - a cause for concern among some European market participants.
In 2007, DTCC cleared and settled transactions with a total notional value of $1.86 quadrillion, while LCH cleared €616 trillion (then $899 trillion) of trades.
With European regulators pushing for greater control in post-trade services, as seen most clearly with the European Commission's drive for an EU-domiciled clearing solution for credit default swaps (CDS), the DTCC went to lengths on Tuesday to reassure European market participants that LCH will still operate as a European firm.
A European holding company - LCH.Clearnet HoldCo - is to be created from the merger, with a governing board made up of European firms. The company would be subject to local regulatory supervision in the UK and the eurozone, DTCC said.
Clarke Pitts, London-based managing director in charge of equity derivatives at Daiwa Securities SMBC, suggested that while US-domination in European markets may be a concern to some dealers, the new consortium of investment banks is less motivated by these concerns. "It is, as others have pointed out, conceivable that EU regulators could be worried about regulatory interference from the US. However, the consortium will be mainly motivated by the revenue opportunity," he said.
The prospect of a dealer-owned clearinghouse could cause concerns of its own over potential conflicts of interests. However, Conor Cunningham, executive director of fixed income, futures and options at JP Morgan in London, disagreed: "The defining line between exchanges and brokerage houses is being blurred, and this is a natural evolution of consolidation in the industry".