Euronext Takes Stake in LCH’s French Clearinghouse

Pan-European exchange operator Euronext has signed a ten-year deal with LCH SA, majority owned by the London Stock Exchange Group (LSEG), which will see the central counterparty (CCP) provide clearing services for listed financial and commodity derivatives. As part of the deal, Euronext will exchange its existing 2.3 percent stake in the wider LCH Group for 11.1 percent of the Paris-based SA business.

“This is essentially an agreement to renew the contract with LCH,” says Lee Hodgkinson, CEO of Euronext London and head of markets and global sales for Euronext. Euronext had previously used LCH SA as its clearinghouse of choice, before switching to the Intercontinental Exchange (ICE) Group’s ICE Clear Netherlands facility in April.

Unlike its SwapClear business, which is dominant in rates clearing, LCH’s SA unit is primarily concerned with clearing listed and credit derivatives, an area which has traditionally been controlled to a large extent by ICE and Deutsche Börse. The profile of the French business is expected to grow over the next few years as the UK prepares to leave the European Union, particularly as European authorities have suggested that systemically important CCPs that clear euro-denominated instruments may be forced to physically relocate to the Eurozone.

The deal, which will be finalized shortly, also comes with a commitment to reduce clearing fees by between 5 to 15 percent by January 2019, depending on the service and the product. According to Euronext, the precise quantum of the reduction for allocation to each derivative product line will be refined in consultation with market users. 

“We have comparable financial conditions for all; Euronext, shareholders and clients,” Hodgkinson says, adding that customers will also avoid the need to migrate to a new clearing platform, which will also relieve them from additional costs. 

Euronext will recognize at closing a net capital gain following the share swap of around €24 million. The deal has wider implications for the relationship with LCH SA, though, as essentially, Euronext will be able to have a say on any possible future sale of LCH SA.

A source within LCH tells WatersTechnology that Euronext has minority protection rights as part of its equity, including pre-emption rights if LCH ever decides to sell more than 50 percent of the CCP. 

Hodgkinson adds that that doesn’t mean that it will be able to block any future LCH SA deal. “We will have the right for a first offer and a matching right on the sale conditions,” he explains. The LCH source, though, says that LCH SA is a strategic asset for both the LCH Group and LSEG.  

“There’s no intention to sell that asset,” the source says.

Previous deal on ICE

The new deal scuppers the April agreement with ICE, which had been widely seen as a pressure tactic at the time, owing to the fact that Euronext had agreed in principle to purchase LCH SA from the LSEG. The London-based group had agreed to sell the French CCP as a remedy to antitrust concerns from the European Commission (EC) regarding its proposed merger with rival exchange group Deutsche Borse.

However, the sale was conditional on the completion of the merger, which was ultimately blocked by the EC on March 29 when LSEG refused to divest elements of its Italian operations, specifically its MTS fixed income trading platform.

When that deal fell apart, LSEG refused to sell LCH SA to Euronext, and the relationship between the two firms appeared to be shaky. In a statement issued after ICE and Euronext announced their deal, LCH said that the latter’s contribution to revenue had been “immaterial.”

“There will be some breakup fees with ending [the ICE] deal, but they’re not material to us,” Euronext’s Hodgkinson says. He clarifies that there will be no implications for Euronext’s clients as the firm hadn’t started the migration process to ICE. 

A spokesperson for ICE declined to comment.