A proposed merger between North America’s Depository Trust & Clearing Corporation (DTCC) and the European Union’s LCH.Clearnet fell apart in late April. That leaves the door open to a bid for LCH.Clearnet by a consortium of users led by inter-dealer broker Icap, whose founder and president, Michael Spencer, has been trying to set up a clearing operation for OTC derivatives for years.
DTCC clears and settles the bulk of U.S. securities transactions, while LCH.Clearnet clears and settles both securities and derivatives in Europe, and recently finalized long-awaited deals to clear and settle trades for Chi-X, which is Europe’s largest multilateral trading facility (MTF) for equities, as well as pan-European equity trading platform Turquoise, and Arca Europe, NYSE Euronext’s pan-European MTF.
The merger between the two had been proposed early last year, and was essentially a takeover of LCH.Clearnet by DTCC, but with LCH.Clearnet providing some of the financing. DTCC pulled the plug on the deal in late April, citing cost and complexity, but sources close to the deal say the U.S. clearinghouse believed that European regulators wouldn’t authorize the takeover of a European clearinghouse by one from outside the EU.
The Icap-led consortium had launched an £800 million bid for LCH.Clearnet before DTCC withdrew its offer, and consortium members already own 15% of the 73% of LCH.Clearnet owned by users. A consortium takeover would thus keep the operation in the hands of users, albeit a smaller concentration of larger users than is currently the case.
Regulators are likely to focus on whether the new entity will be for-profit or non-profit. A for-profit entity would, theoretically, be more inclined to act as a service provider, but also more inclined to ratchet up prices if no competition emerges. A non-profit, user-owned entity would, theoretically, act in the best interest of users, but would also be beholden to those users who hold the most influence (namely, the owners).