Wednesday, April 29, 2009

Morgan Stanley Said to Join ICAP-Led Group Bidding for LCH

Posted on Bloomberg by Nandini Sukumar:

Morgan Stanley will join a group of brokers and banks led by ICAP Plc that may bid for LCH.Clearnet Group Ltd., according to three people familiar with the situation.

The move comes as Depository Trust & Clearing Corp. today abandoned plans to merge with London’s LCH.Clearnet, the biggest European securities clearinghouse.

Barclays Plc, Credit Suisse Group AG and Nomura Holdings Inc. also may join the ICAP-led alliance planning to bid for LCH.Clearnet by May 29, two people familiar with the situation said yesterday.

DTCC, LCH Merger Collapses

Depository Trust & Clearing Corp. abandoned plans to merge with London’s LCH.Clearnet Group Ltd., the biggest European securities clearinghouse, after brokers and banks led by ICAP Plc said they may bid for the U.K. company.

DTCC said it will pursue “strategic alternatives” in Europe. The ICAP-led alliance told LCH.Clearnet on April 27 it may make a bid by May 29, people familiar with the matter said.

New York-based DTCC first agreed to buy LCH.Clearnet in October for 739 million euros ($979 million) to form the world’s biggest processor of trades in stocks, bonds, currencies and derivatives. The closure of the deal had already been delayed twice. LCH.Clearnet is 73.3 percent owned by banks and brokers that use its service.

“The banks don’t want LCH.Clearnet in American hands and there’s a lot to lose from not owning your clearinghouse,” said Mamoun Tazi, Geneva-based exchange analyst at MF Global Securities Ltd. “There are now two options for LCH.Clearnet. One, they stay as they are, and two, that the consortium will buy out the other shareholders.”

LCH.Clearnet provides guarantees for about half of Wall Street’s interest-rate swap transactions, the $458 trillion market where companies hedge the risk of borrowing costs moving against them. The company also plans to offer clearing for credit derivatives as regulators seek control over the $28 trillion market after the collapse of New York-based Lehman Brothers Holdings Inc. and American International Group Inc.

‘Tipping Point’

The ICAP alliance already includes Deutsche Bank AG of Frankfurt and New York-based JPMorgan Chase & Co. London-based Barclays Plc, Credit Suisse Group AG of Zurich and Tokyo-based Nomura Holdings Inc. may join the group, two people familiar with the situation said yesterday.

“This could be the tipping point with those three jumping in,” said Mark Williams, a finance professor at Boston University School of Management, said yesterday. “That’s a really strong group. Those are significant players with significant volume so their getting in is important to those competing against them.”

The European clearinghouse is also 15.8 percent owned by Brussels-based Euroclear, the region’s largest settlement agency, and 10.9 percent by exchanges.

‘The Solution’

“LCH has several options under consideration and all of them need to be looked at,” Pierre Francotte, the chief executive officer of Euroclear, said in an interview in London yesterday. “We have seen the DTCC proposal and I would like to see the consortium’s. No matter what the solution is, it should address the issue of equity-clearing fees.”

DTCC operates a European unit which clears trades for London-based alternative stock trading systems, including Turquoise, NYSE Euronext’s SmartPool block trading system and its NYSE Arca Europe alternative market.

“We will compete with LCH.Clearnet,” said Stuart Goldstein, a New York-based spokesman for DTCC. “In addition we are pursuing other strategic alternatives. We are well positioned to grow in Europe. Everyone who has chosen us has done so because of our pricing and the reliability and certainty of our technology.”

New York-based Citigroup Inc. and Zurich-based UBS AG are also part of the ICAP alliance, along with Paris-based BNP Paribas SA and Societe Generale SA, London-based HSBC Holdings Plc, and Royal Bank of Scotland Group Plc in Edinburgh, according to people familiar with the plan.

Some clearinghouses operate central counterparties to every buy and sell order executed on an exchange, reducing the risk that a trader defaults on his obligation in a deal. Customers pay fees for clearing, or post-trade processing services, which include verifying that a buyer has the funds to execute a trade.

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