LCH.Clearnet enters talks to buy Nasdaq swaps clearinghouse

New York-based Nasdaq will become a shareholder in LCH.Clearnet

LCH Clearnet logo LCH Clearnet logo

April 24 (Bloomberg) -- LCH.Clearnet Group Ltd. entered discussions to buy Nasdaq OMX Group Inc.’s International DerivativesClearing Group LLC as the world’s largest interest- rate swaps clearinghouse seeks to expand in the U.S.

The companies have signed a non-binding agreement, London-based LCH said today in a statement. New York-based Nasdaq will become a shareholder in LCH.Clearnet, joining London Stock Exchange Group Plc, after the deal is completed, according to the statement. No financial terms were released.

LCH.Clearnet is seeking to expand its U.S. business in guaranteeing interest-rate swaps with its SwapClear clearinghouse. The service began processing interest-rate contracts traded between banks in 1999 and expanded to offer U.S.-based services in March 2011.

“This is all about making SwapClear a more attractive clearing venue in the U.S. for end users,” Richard Perrott, a London-based analyst at Berenberg Bank, said in a phone interview today. “This will make it easier to organize cross margining and capital offsets. IDCG has not been a huge success.”

New York-based IDCG, which opened in January 2009 for interest-rate swap futures, has struggled to capture market share. Nasdaq last year tried to buy a minority stake in LCH.Clearnet, with Chief Executive Officer Robert Greifeld seeking talks on how IDCG and LCH could work together.

Sale Options

“Investors won’t be surprised that Nasdaq has been considering sale options for this business initiative,” Niamh Alexander, an analyst at KBW Inc., wrote in a report today. “IDCG has not generated significant revenue as of yet and we estimate that this division has cost Nasdaq about $10 million, or $0.05 in earnings-per-share, annually to support.”

LCH.Clearnet is also in discussions to join NYSE Euronext’s venture to take on CME Group Inc. in interest-rate trading. SwapClear would add U.S. rate swaps to the types of trades accepted by New York Portfolio Clearing to lower margin costs, the companies said last month.

“This will facilitate that happening considerably,” Michael Davie, chief executive officer of SwapClear, said in an in a telephone interview today. “The way we are looking at this is a strategic move for LCH,” he said. “It’s about a long-term commitment to the U.S. market.”

More Complicated

SwapClear has guaranteed more than $686 billion of interest-rate swaps between dealer banks and their customers, it said in the statement today. CME Group, based in Chicago, had backed $393.7 billion in rate swaps as of April 6, it said earlier this month.

The new U.S. business “is going very, very well,” Davie said. “This is very much to complement the existing offering we have.”

While swaps between banks have been cleared since 1999 by SwapClear, doing the same for trades between banks and asset managers or hedge funds is more complicated, Davie said.

“The question is, ‘how will the buy-side come to clearing?’” he said. “In that, CME will be a major clearer, but not the only one.” He noted that LCH.Clearnet has cleared more customer trades than CME to date. “Our hope is this will up the ante,” he said.

CME Group spokesman Michael Shore didn’t immediately respond to a telephone message seeking comment.

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