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Short term, the deal will help LCH meet a €320 million funding shortfall under tougher capital requirements that are being introduced for clearing houses in Europe to reflect their critical role in the functioning of financial markets. It is part of a global regulatory push to safeguard the world’s financial markets in the wake of the financial crisis. Authorities want to move more of the opaque over-the-counter derivatives market on to electronic trading venues and have trades processed through clearing houses. A clearing house stands between two parties, guaranteeing a deal in the event one party defaults.
Xavier Rolet, chief executive of the LSE, sees these changes as benefiting his company and LCH, as open-ended derivatives contracts require regular risk management fees.
LCH is an attractive target as it is world’s largest clearer for interest rate swaps, which are used by big global banks and corporations to hedge against interest rate moves. It is also the second-largest clearer for repo trades, the main source of short-term funding for banks.
From June, LCH will lose its revenues from NYSE Liffe as it switches to ICE European clearing house. But LCH will begin clearing for NLX, the new European fixed income trading platform set to be launched by Nasdaq OMX, in April.
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