29 April 2008

LCH.Clearnet and DTCC reported to be in merger talks

European clearing house LCH.Clearnet has held merger talks with US counterpart Depository Trust & Clearing Corporation (DTCC) about a possible merger that would create the first transatlantic provider of post-trade services. the Financial Times (FT) reported, citing unnamed sources.

The FT said the two sides had talked ‘intermittently’ over the last nine months, but the negotiations were by no means likely to result in a deal.

The paper said a tie-up between the two would create Europe's biggest clearing and settlement group, and would likely be structured as a takeover of LCH.Clearnet by the DTCC.

FT Article:

Talks on creating Europe’s top clearing house

Europe’s largest clearing house, LCH.Clearnet, and The Depository Trust & Clearing Corporation of the US have held talks about a possible combination that would create the first post-trade services group straddling the Atlantic, people familiar with the situation said.

The talks come as Europe is struggling to streamline its fragmented market for clearing and settlement services – the crucial infrastructure that underpins most stock and derivatives trading.

LCH.Clearnet has been left reeling by the possible loss of business from two of its main customers, the London Stock Exchange and Liffe, the futures exchange.

Any merger with LCH.Clearnet – likely structured as a takeover by the DTCC – would create by far the largest clearing and settlement group in Europe.

But the people familiar with the situation said the talks, under way intermittently over the past nine months, were by no means likely to result in a deal.

Stuart Goldstein, DTCC spokesman, said: “I’m not in a position to comment on that, other than that we always have discussions with other infrastructure organisations in Europe and are always looking at ways to support the common needs of industry.”

LCH.Clearnet declined to comment.

The biggest users of exchanges and trading platforms – such as banks – argue that Europe would benefit from having a single clearer and settlement provider, mirroring the model with the DTCC in the US.

US costs are lower than in Europe partly because DTCC is a low-cost quasi-utility owned by market users.

Through a subsidiary, DTCC clears and settles almost all stock trades done in the US, including the New York Stock Exchange and Nasdaq. It also handles post-trade services for corporate and municipal bonds and settles OTC derivatives.

By contrast, Europe has a complex mix of “vertical silos” – where clearers are owned by exchanges – and LCH.Clearnet, owned by market users and exchanges.

A clearer guarantees that two parties to a trade do not default, while settlement ensures that the ownership of the traded asset and cash change hands.

Charlie McCreevy, EU internal market commissioner, this month expressed frustration at slow progress on a “code of conduct” he brokered with exchanges, clearers and settlement systems to cut cross-border costs by opening up their post-trade businesses to each other.

The emergence of DTCC may indicate that the US operator believes it has a chance to participate in shaping the European post-trade services landscape while fulfilling ambitions to expand beyond the US.

By Jeremy Grant in London

© Financial Times