LSE chief casts doubt over timing of LCH deal

LONDON Fri Nov 16, 2012 11:27am GMT

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LONDON (Reuters) - The London Stock Exchange (LSE.L) may not complete its 600 million euro ($767.5 million) purchase of European clearing house LCH.Clearnet this year as expected, its chief executive has warned.

Announcing flat profits of 217.2 million pounds in the first half, Xavier Rolet refused to say the takeover of LCH would complete this year despite the group having earlier said it expected this to happen.

"We are in conversations with LCH and the authorities and we'll have to see what they decide. I can't speculate on the outcome or the timeline," Rolet said on a phone call.

The LSE wants LCH because the clearing house would reposition the British exchange to move aggressively into derivatives ahead of regulatory plans to overhaul this market.

Clearing houses, which sit between trading firms, insuring them against losses in the event of a counterparty default, have taken on greater importance since the collapse of Lehman Brothers four years ago.

Regulators want to force more trading through such vehicles to help guarantee smoothly functioning markets even at times of stress.

The LCH deal was agreed by shareholders of both sides in April, leaving it only needing regulatory approval to go through, something the LSE has said it expected to happen in the fourth quarter of 2012.

But the terms of the acquisition were called into question by analysts in September when the European Commission proposed rules for clearing houses that would, if passed, leave LCH needing to boost its regulatory capital by more than 300 million euros.

The aim of this would be to bolster LCH's own position, but it could also eat into the returns it generates.

ACCEPTABLE RETURNS

"The group is in discussions with LCH.Clearnet regarding ... the measures LCH.Clearnet is exploring to ensure it can continue to deliver an acceptable return on its capital," the LSE said in a statement on Friday.

Analysts believe Rolet could look for more drastic cost-cuts at LCH and a change to the profit-sharing agreements with shareholders, in a bid to claw back the money the LSE will need to put up as capital if the deal goes through.

Rolet said on Friday the LSE would update the market on the outcome of these talks "in due course".

"Regulatory changes in clearing means the LSE needs to look at the LCH.Clearnet deal in light of higher clearing house capital requirements," said Richard Perrott, an analyst at Berenberg Bank.

Analysts say the extra capital requirements on LCH, which the clearing house estimated at between 300 million euros and 375 million, may hold the LSE deal up but it will go through.

"The surprise capital call for LCH has by implication raised the acquisition price for the name, but we still believe the transaction has strategic merit," said Daniel Garrod, an analyst at Barclays (BARC.L).

The British exchange agreed to pay 600 million euros for 60 percent of LCH in March, with LCH's existing bank shareholders keeping the remaining 40 percent.

Rolet said on Friday he still expected to secure the backing of the two remaining authorities - the British and Portuguese competition agencies - before the end of the year.

The chief's comments came as the group reported results for the six months to the end of September. It said in a statement a 19 percent fall in capital markets revenue to 129.7 million pounds was partly offset by a 25 percent improvement in net treasury income to 68.1 million pounds from its clearing business.

Group revenue rose 7 percent to 349.8 million pounds, boosted by the acquisition of the FTSE index business late last year.

LSE shares were down 0.3 percent at 927.5 pence by 1123 GMT, while the FTSE 100 index .FTSE was down 0.6 percent.

(Editing by David Cowell and David Holmes)

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