The Depository Trust and Clearing Corporation (DTCC), which provides post-trade services to the US market, is planning to buy European clearing house LCH.Clearnet for EUR 739 million. The merger of the two firms will create the first transatlantic clearing house.
Under the plans, LCH.Clearnet will start offering its services at cost within three years. Excess revenue will be returned to users in the form of rebates, discounts or tariff reductions. LCH.Clearnet will also merge with EuroCCP, DTCC’s pan-European central counterparty (CCP), to form LCH.Clearnet HoldCo, a new holding company for the group’s European clearing business.
The firms expect the merger to result in lower costs for both LCH.Clearnet’s and DTCC’s services, mostly for equities in both Europe and North America. Efficiency gains are expected to come from technology savings and greater economies of scale. Initial estimates suggest that synergies could amount to between 7% and 8% of the combined group’s operating costs.
The plans represent a big strategic shift for LCH.Clearnet. As well as moving to an at-cost model, its absorption of EuroCCP means the new entity will become the clearing house for several planned and operational European multilateral trading facilities (MTFs). These include Turquoise and two NYSE Euronext initiatives, its SmartPool dark pool and its NYSE Arca Europe displayed trading platform.
LCH has previously appeared reluctant to embrace MTFs. Europe’s established clearers, including LCH, are understood to have shunned requests from Chi-X and Turquoise to act as a central counterparty. Turquoise subsequently chose EuroCCP, and Chi-X opted for Fortis’ European Multilateral Clearing Facility.
It has also been wary of the European Commission’s Code of Conduct for Clearing and Settlement, which aims to enhance interoperability between post-trade providers. Although it signed up to the code, LCH.Clearnet said it would refuse to interoperate with its competitors in the London market if it could not get reciprocal access their markets. This reluctance is believed to have delayed the London Stock Exchange in offering clearing via Swiss central counterparty SIS x-clear as well as LCH.Clearnet.
LCH, though its UK subsidiary LCH.Clearnet Ltd and French subsidiary LCH.Clearnet SA, provides clearing services to a range of European stock exchanges, including the London Stock Exchange and NYSE Euronext’s European operations.
LCH.Clearnet is owned 73.3% by users, 10.9% by exchanges and 15.8% by Euroclear. As the largest individual shareholder, Euroclear has said it will support the transaction. After the transaction closes, the firm is expected to take a similar-sized stake in LCH.Clearnet HoldCo.
Roger Liddell, currently CEO of LCH.Clearnet, will become the CEO of LCH.Clearnet HoldCo, and Donald Donahue, chairman and CEO of DTCC, will become the new unit’s chairman.
LCH and DTCC expect to be in a position to sign definitive documentation and announce detailed terms of the transaction by 15 March next year.