The American securities clearing house Depository Trust & Clearing Corporation (DTCC) and its European rival LCH.Clearnet have agreed to combine to create the world's biggest clearing house in an effort to cut trading costs.
Under the terms of the deal, expected to close in the second quarter of next year, DTCC will buy LCH for as much as €739m (£583m), or €10 per share, giving LCH shareholders 34 per cent of the combined entity. LCH's biggest shareholder, Euroclear, which holds just under 16 per cent of the company, has agreed to the deal in principle. The combined entity will be user-owned and run like DTCC as a not-for-profit company.
Brokers pay fees for clearing, or post-trade processing services, which include verifying that a buyer has funds to execute a trade. The combined company would provide clearing for trades in equities, fixed-income securities, exchange-traded derivatives and commodities, mutual funds, annuities and over-the-counter products such as interest rate swaps, credit default swaps, carbon emissions and freight contracts.
The deal could help bring down equity clearing costs in Europe, which are higher than those in the US. The companies plan to cut 7 to 8 per cent of combined costs, or about €50m a year.
The merger comes after the EU Internal Market commissioner, Charlie McCreevy, said last week that there is now a pressing need for a central clearing counterparty to trade derivatives. He referred to a vacuum in the system since the collapse last month of Lehman Brothers, which negotiated many of the world's derivative contracts.
"We expect we will get a lot of attention from regulators – and that is a process we are keen to embark upon," said Roger Liddell, LCH.Clearnet's chief executive.