Wednesday, October 22, 2008

DTCC and LCH.Clearnet to merge

We've had transatlantic exchange mergers, now it seems that securities clearing houses are tying the knot with the DTCC and LCH.Clearnet announcing their intentions to merge.

The merger has been a long time coming, given the fragmentation within securities clearing in Europe and the lack of "interoperability" in the clearing layer, which is one of the conditions set down by the European Code of Conduct for Clearing and Settlement.

Interestingly, the DTCC revived the old Nasdaq Europe platform, EuroCCP, in an effort to give firms a choice of where they clear and to break away from the model of clearing being a "proprietary function of vertical exchanges".

Following resolution of certain key commercial, legal, tax and regulatory issues, it is intended that DTCC’s existing European subsidiary, EuroCCP, will join with the new LCH.Clearnet HoldCo to form a single European clearing business.

It kind of makes you wonder why the DTCC bothered setting up EuroCCP in the first place as merger discussions with LCH.Clearnet have been ongoing for some time, and perhaps in this current economic environment where risk management and cost savings are uppermost in people's minds, LCH.Clearnet finally caved.

It is unclear which technology platform will predominate, but it is anticipated that the proposed merger will result in efficiency gains, largely derived from technology savings, as well as economies of scale as both the US and Europe would be supported by a common infrastructure. As such "further reductions in the costs of LCH.Clearnet’s and DTCC’s services", most notably for equities in both Europe and America, are anticipated. Other markets will also be covered including, fixed income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and OTC products such as interest rate swaps and credit default swaps.

The formal announcement from the DTCC said that LCH.Clearnet would move to an at-cost based structure comparable to DTCC’s within three years. It is believed Euroclear, which has a 15.8% holding in LCH.Clearnet supports the transaction in principle and will remain a shareholder.

A "binding" agreement between the DTCC and LCH.Clearnet is subject to a number of conditions including; consultation with the Works Council in the French subsidiary of LCH.Clearnet, the approval of shareholders, and the relevant regulators and tax authorities.

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