London Stock Exchange Group is exploring the potential sale of LCH SA, the French-regulated operating subsidiary of LCH Group, in a bid to win approval for its planned merger with Deutsche Boerse.
In its review of the proposed US$27bn merger between the two exchange groups, the European Commission raised antitrust concerns around the two firms’ clearing operations, prompting LSEG to pro-actively seek a possible sale for its French clearing arm.
According to LSEG, any sale would be subject to review and approval by the European Commission and would also be conditional on the successful closing of the merger.
The European Commission will complete its investigation into the impact of the merger on competition across clearing and derivatives by late January.
LCH controls over-the-counter derivatives clearing across Europe with US$274trn notional outstanding in cleared interest rate swaps. Eurex operates a rival service with €776bn of cleared swaps notional outstanding in EurextOTC Clear.
Hiving off the French arm of LCH may go some way to appeasing competition regulators, but any sale of would leave the combined group’s dominance of OTC derivatives clearing largely intact.
LCH SA provides clearing services across cash equities, derivatives, fixed income and triparty repos. Through CDSClear, it provides clearing services for European and US index and single name credit default swaps.
CDSClear provides clearing in over 1,000 single name instruments and key index contracts including iTraxx Europe, Crossover and CDX. It is authorised as a central counterparty under the European Markets Infrastructure Regulation and a Derivatives Clearing Organisation with the US CFTC.
The platform has cleared US$826bn of gross notional in CDS contracts, covering almost 45,000 transactions. Those volumes remain low compared to rival operator, InterContinental Exchange, which has cleared more than €81trn of notional in single name and index CDS trades through ICE Clear Credit in the US and ICE Clear Europe.
Potential buyers of the French business include pan-European stock exchange Euronext, which has raised concerns about the dominance of the merged group in cleared derivatives. LCH SA currently works in close partnership with Euronext, providing clearing for the exchange’s continental European derivatives as part of a long-term agreement that extends until December 2018.
