LCH.Clearnet, which is in the process of being acquired by the London Stock Exchange, has completed the acquisition of a clearing house from Nasdaq OMX (NDAQ) that will allow the Anglo-French firm to expand its U.S. franchise. LCH.Clearnet's deal to buy the U.S.-based International Derivatives Clearing Group will also expand access to new domestic U.S. clients, some of whom will be forced to clear their swap trades under new regulations. Under the terms of the deal, first announced in April, the companies have completed a share swap giving Nasdaq OMX a 3.7% stake in LCH.Clearnet, valued at EUR19 per share. IDCG, which has been renamed LCH.Clearnet (US) LCC, has become a subsidiary of LCH.Clearnet. About five of IDCG's 13 staff have stayed on, while Garry O'Connor, chief executive of IDCG, has left the firm, according to people close to the company. "This is a relatively low-risk, straightforward deal but strategically it is a very important transaction for LCH.Clearnet," said Ian Axe, chief executive of LCH.Clearnet, in an interview. The deal secures LCH.Clearnet a more U.S.-centric offering for its interest-rate swap franchise, which the company is defending against a range of new challengers. LCH.Clearnet for years had been registered with U.S. regulators, and has been able to process swap transactions for U.S. customers while keeping collateral and margin within the country. However, some potential customers still harbored concerns around its base in the U.K., which operates a different bankruptcy regime. Taking over the IDCG unit allows LCH.Clearnet to offer customers the ability to clear their swap transactions through a U.S. entity which the company expects to launch in the fourth quarter this year, subject to regulatory approval. It comes as new rules outlined under Dodd-Frank in the U.S. and the European market infrastructure regulation promise to create a swathe of new business by forcing standardized over-the-counter trades through clearing houses. "We have an international model, and are happy for anyone to be serviced through it, but in such a large domestic market as the U.S. it is right to have the proper U.S. legal entity," said Mr. Axe. "By operating a domestic clearing house we are able to access a number of banks and real-money clients who prefer to clear under U.S. default bankruptcy laws." The move highlights ongoing concerns on the part of the international buy-side community regarding their legal rights in the event their clearing provider, which often becomes temporary legal custodian of a buy-side firm's collateral assets, goes bust. In a similar move to LCH.Clearnet, CME Group Inc. (CME) created a U.K.-based legal entity for clearing in Europe after it became apparent customers there were much more comfortable clearing through a local legal entity. For Nasdaq OMX, Wednesday's deal cuts a money-losing growth effort that had been slow to develop since the exchange operator took majority ownership in late 2008. The slow pace of implementing the new swap rules and Nasdaq OMX's status as a new entrant to the business represented challenges for IDCG, according to analysts. IDCG, which was launched in 2009, was majority-owned by Nasdaq OMX, with dealers and custodians, including The Bank of New York Mellon (BK), holding minority stakes. The clearing house was one of several to emerge in the wake of the global financial crisis to capitalize upon the new post-crisis regulatory agenda. The London Stock Exchange secured shareholder approval to purchase a 60% stake in LCH.Clearnet in April. That deal is subject to regulatory approval. -Write to Michelle Price at michelle.price@dowjones.com and Jacob Bunge at jacob.bunge@dowjones.com Subscribe to WSJ: http://online.wsj.com?mod=djnwires
