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DTCC and LCH to Merge

The New York-based Depository Trust & Clearing Corp. (DTCC) has agreed to buy the UK’s LCH.Clearnet to form the world’s largest clearing house for trades in shares, bonds and derivatives.

The combined company would be owned largely by users and would operate a user-governed model, with LCH.Clearnet moving to an at-cost based structure comparable to DTCC’s within three years, the companies say.

DTCC, which clears and settles US stocks and bonds, says it will acquire all of the shares of LCH.Clearnet, which clears a range of securities and over-the-counter derivatives markets in Europe.

The range of markets covered would include equities, fixed income instruments, OTC products such as interest rate swaps, credit default swaps and carbon emissions, exchange-traded derivatives, commodities, mutual funds and annuities.

Last week LCH confirmed that it is also considering a move into the OTC foreign exchange clearing space (Squawkbox, 20 October).

LCH.Clearnet shareholders will receive up to 739 million or 10 a share. They will receive shares in DTCC, shares in the vehicle set up to acquire LCH – giving them a share of future profits for three years – and through a special dividend from LCH.Clearnet.
Euroclear, which is LCH.Clearnet’s largest shareholder with a 15.8% stake, has agreed to support the merger in principle.

The two companies expect to reduce costs for users partly by sharing and integrating the systems they use to process their markets. This would mean that banks would no longer have to maintain connections to a range of different clearing platforms. They may also benefit by being charged lower fees as they channel a larger amount of business into one company.

The merged organisation expects to save the equivalent of 39 million annually for the next few years because of the common infrastructure that the two firms will now have, as well as enhanced economies of scale. Synergies are forecast to amount to approximately 7 to 8% of the combined group’s operating costs.

The merger comes at a time of mounting interest in the role of a centrally cleared environment to reduce counterparty risk.

“The critical role and value of clearing houses has been highlighted by recent events. The merger of our companies will enable our users to benefit from a broader geographic footprint and a greater range of expertise as well as realising important efficiencies and economies of scale,” says A. Chris Tupker, chairman of LCH.Clearnet.

â?¨The combined operation will be headed by chief executive officer of LCH.Clearnet, Roger Liddell while Donald Donahue, chairman and chief executive of Depository Trust, will assume the role of chairman.

Expectations are the merger, which needs formal regulatory approval, will complete by mid-2009.

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