Euronext faces a bind over LSE Clear­net sale

Ri­vals like CME Group seen as pos­si­ble bid­ders

Kuwait Times - - BUSINESS -

The Lon­don Stock Ex­change’s move to sell off its French clear­ing busi­ness has left France’s stock mar­ket op­er­a­tor Euronext fac­ing a dilemma. The Paris-based ex­change has be­gun talks with LSE to buy LCH Clear­net SA ac­cord­ing to sources fa­mil­iar with the ne­go­ti­a­tions. The Bri­tish bourse has put the plat­form up for sale to help get its $28 bil­lion merger with Deutsche Bo­erse ap­proved by Euro­pean com­pe­ti­tion au­thor­i­ties, and Euronext is seen as the far­away fa­vorite to buy it.

The deal would strengthen Euronext’s po­si­tion in the com­pet­i­tive Euro­pean clear­ing mar­ket fol­low­ing its ac­qui­si­tion of a 20 per­cent stake in Nether­lands-based clear­ing house EuroCCP. It would also give it con­trol of a plat­form that it pro­vides much of the rev­enue for and would al­low it to avoid re­ly­ing on a com­peti­tor’s clear­ing house for an es­sen­tial ser­vice.

Clear­ing forms a crit­i­cal part of the fi­nan­cial sys­tem’s plumb­ing, guar­an­tee­ing a trade is com­pleted even if one side of the trans­ac­tion goes bust. Clear­ing is be­com­ing a growth sec­tor in trad­ing as new rules in­tended to ap­ply lessons from the fi­nan­cial cri­sis mean far more de­riv­a­tives will have to pass through a clear­ing house, en­sur­ing their vol­umes will swell in com­ing years. But there’s a catch. If Euronext buys Clear­net SA, the chances of LSE get­ting the nod from com­pe­ti­tion reg­u­la­tors to merge with Deutsche Bo­erse in­crease as it would ease con­cerns about a con­cen­tra­tion in the clear­ing mar­ket. But the deal would still leave Euronext a min­now com­pared with a com­bined An­gloGer­man ex­change.

“Of course Euronext is keen to ac­quire Clear­net,” said a source di­rectly in­volved in the talks. “But Euronext is prob­a­bly even more keen to see the LSE-Deutsche Bo­erse merger fail.”

Euronext said in a state­ment that it is “ob­vi­ously con­sid­er­ing this sit­u­a­tion (LCH.Clear­net SA), be­cause this as­set be­longed to Euronext un­til 2003.” But it de­clined to comment on whether the com­pany is cur­rently in talks with LSE. “We are a nat­u­ral buyer but not at any price, es­pe­cially since our clients rep­re­sent ap­prox­i­mately half of the rev­enues of the com­pany,” it added.

Pol­i­tics at play

A de­ci­sion by Euronext, which also op­er­ates ex­changes in Bel­gium, Nether­lands, and Por­tu­gal, to buy Clear­net would be watched not just by the Lon­don and Ger­man ex­changes - politi­cians in France also have an in­ter­est. The French govern­ment wants crit­i­cal mar­ket in­fra­struc­ture to be lo­cally owned, and Pres­i­dent Francois Hol­lande and other Euro­pean pol­i­cy­mak­ers say euro-de­nom­i­nated de­riv­a­tives con­tracts should be cleared in the sin­gle cur­rency area.

The bulk of euro-de­nom­i­nated swaps are cur­rently cleared by the Lon­don half of LCH Clear­net. But Euronext buy­ing up Clear­net in France could help drive euro clear­ing to Paris and a French-owned ex­change. But like Euronext the French govern­ment - as well as those in Por­tu­gal and Bel­gium - have also spo­ken out against LSE and Deutsche Bo­erse com­bin­ing, say­ing a deal would cre­ate an ex­change so large it could make it more ex­pen­sive for some com­pa­nies in Europe raise money on the cap­i­tal markets.

Buy­ing Clear­net would not be enough to in­stantly trans­form Euronext’s foot­print in the in­dus­try though - and the merger of the Lon­don and Frankfurt ex­changes would be a ready made chan­nel for shift­ing euro-de­nom­i­nated clear­ing from Lon­don to Deutsche Bo­erse’s Eurex clear­ing unit in any case. Peo­ple fa­mil­iar with Euronext’s think­ing say the ex­change’s man­age­ment does not feel un­der obli­ga­tion to buy Clear­net and has “al­ter­na­tive op­tions”, point­ing to the EuroCPP deal as an ex­am­ple, though the lat­ter clears shares and has no im­me­di­ate plans to move into de­riv­a­tives.

Euronext could take its time and wait un­til there’s more clar­ity on whether the LSEDeutsche Bo­erse deal will go through - last month the Euro­pean com­pe­ti­tion reg­u­la­tor raised a se­ries of con­cerns about the pro­posed merger. But LSE is un­likely to off­load the as­set if the deal with Deutsche Bo­erse is re­jected, so there is only a lim­ited time to de­cide. It would also be eas­ier for Euronext to se­cure a deal now as its clear­ing con­tract with LCH Clear­net ex­pires in De­cem­ber 2018, which in mar­ket struc­ture time scale is a very short time frame given all the tests and au­tho­riza­tions re­quired if it is to find an al­ter­na­tive clear­ing house.

Bri­tain’s de­ci­sion to leave the Euro­pean Union has also made LCH’s French arm more at­trac­tive to non-EU play­ers as it would al­low them to op­er­ate in the con­ti­nent with­out hav­ing a so-called “pass­port­ing” deal in place. Chicago-based CME Group, which was touted as a pos­si­ble ri­val bid­der for Deutsche Bo­erse, might want to bid, sec­tor bankers said. CME de­clined to comment. The cash-rich ex­change has been slowly build­ing up a pres­ence in Lon­don, where it al­ready has a clear­ing house. In­dus­try of­fi­cials say Asian ex­changes might also be in­ter­ested in Clear­net as a gate­way into the EU.

That leaves Euronext with lim­ited bar­gain­ing power and time with LSE, as oth­ers might seize the op­por­tu­nity if they fail to agree a deal. An­a­lysts at KBW say Euronext is un­der-lever­aged com­pared to other ex­changes, so has the fire­power to en­sure a deal goes through. The whole of LCH-Clear­net is es­ti­mated to be worth around 600 mil­lion eu­ros ($650 mil­lion) based on what LSE paid for its con­trol­ling stake in 2012, with Clear­net ex­pected to sell for less than that. One banker in the ex­change in­dus­try es­ti­mated it could be worth 400 mil­lion eu­ros. The ques­tion is whether they see the plat­form as a good enough con­so­la­tion prize for an LSEDeutsche Bo­erse merger.— Reuters

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