| ||||||||||
| ||||||||||
— View from the City —
 Three months ago, when LCH.Clearnet Group Ltd., the London and European clearinghouse and central counterparty operation, agreed to merge with its U.S. peer, the Depository Trust and Clearing Corp., competitors worried that the dominant North American player would combine with the dominant European player to become an unstoppable global force. In France, in particular, there was opposition to an American move on the clearing system to match the existing U.S. dominance of the European stock markets. That Yankee power base had evolved out of the New York Stock Exchange's acquisition of the French-led Euronext group of exchanges and Nasdaq's tie-up with the Nordic and Eastern European leader, OMX.
DTCC tried to counter European assumptions by stressing that ownership would be "rebalanced" to reflect usage of the system, that European firms would play a key role in deciding future services and that European subsidiaries would be subject to local rather than U.S. supervision. But suspicions were only partially allayed. So the French were especially relieved when a group of banks, including Société Générale SA and, according to French financial newspaper Les Echos, BNP Paribas SA, as well as Deutsche Bank AG, J.P. Morgan Chase & Co. and possibly also Morgan Stanley, joined up with London broker-dealer Icap plc to launch a counterbid. Other reports suggested the London Stock Exchange Group plc was also involved. Icap, under CEO Michael Spencer, responded on Feb. 2 to weekend press reports of its involvement by announcing its participation in a consortium that had approached LCH.Clearnet. The target itself confirmed that it had received an approach. But despite the nationalist undercurrent and a natural distrust of any dominant operator, whatever its provenance, there are more rational reasons for Icap and others to challenge the DTCC bid. Plenty of institutions are looking for a piece of the action in what for some will be a new market. In a world where credit default swaps and other derivatives went largely unregulated and their trading was conducted in bilaterally negotiated, over-the-counter exchanges, clearinghouses and central counterparties were largely uninvolved. The job of LCH.Clearnet has traditionally been to clear exchange-traded instruments -- from traditional shares to commodities, interbank interest rate swaps and bonds. It also sits in the middle of a transaction, assuming the counterparty risk involved when two parties trade, ensuring the financial stability of the transaction if one side or the other fails. To cover its own risk, it collects collateral -- or margin -- from its members to ensure their obligations can be met at all times. But after the collapse of Lehman Brothers Holdings Inc. and the $150 billion state bailout of U.S. insurer American International Group Inc., financial institutions are girding themselves for a host of new regulations in both the U.S. and Europe. Clearinghouses and central counterparty firms are bound to be involved in the operation of brave, new, regulated and, one hopes, transparent derivative markets. Still, it's an odd move for Icap, which has built itself up as the world's largest broker of OTC trades and would naturally prefer to keep its own business focused on the areas it best understands. It's a shift into new territory, too, for the London Stock Exchange, which unlike its Continental rivals has neither operated its own derivatives exchange (though it has established platforms in the Nordic countries and Moscow) nor built its own clearinghouse. It did acquire a clearing system with its purchase of the Borsa Italiana SpA in 2007 but continues to offer its clients "competitive clearing," by presenting them with the choice of using either LCH.Clearnet or Swiss provider SIX X-clear AG. Yet as the world changes and politicians tighten their grip on the oversight of the markets, traditionally freewheeling businesses like Icap and steady institutions like the LSE have all been forced to ditch old principles and adapt pragmatically to the new realities. As the consortium prepares its reported £800 million ($1.2 billion) bid and aims to trump the €739 million ($956 million) offer from DTCC, there's also the hope of making good profits. DTCC, by contrast, is arguing for an "at-cost-based structure" similar to its own. That could further undermine the over-the-counter business model, which made the likes of Icap so profitable in the past. |
|
|
|
|
|
