DTCC and LCH.Clearnet merger to create world's leading clearing house
The Depository Trust & Clearing Corporation and LCH.Clearnet Group have signed a non-binding agreement to merge the two companies, creating the world's leading clearing house and, the companies say, lowering the cost of clearing equity transactions.
The merger would create an institution with a user-owned and governed model, with LCH.Clearnet moving to an at-cost based structure comparable to DTCC's within three years. Once the cost of operations has been covered, the institution would return excess revenue to users in the form of rebates, discounts or tariff reductions.
LCH.Clearnet shareholders would receive total consideration of up to EUR739m, or EUR10 a share, the majority of which would be funded through LCH.Clearnet's revenue. Euroclear, currently the largest shareholder in LCH.Clearnet with a holding of 15.8 per cent, intends to support the transaction in principle.
The partners say the planned merger will result in significant synergies and efficiency gains, largely derived from technology savings, as well as significantly enhanced economies of scale, totalling an estimated 7 to 8 per cent of the combined group's operating costs.
With the US and Europe supported by a common infrastructure, they expect further reductions in the costs of LCH.Clearnet's and DTCC's services, most notably for equities in Europe and the US.
In addition, the companies say, users would benefit from access to default funds and potentially increased cross-margining, maximising the efficacy of members' capital contributions and providing a safeguard in volatile market conditions.
The combined group's range of markets and services covered would include asset classes such as equities, fixed-income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and OTC products such as interest rate swaps, credit default swaps, carbon emissions and freight contracts.
Its clients served globally would include several thousand broker-dealers, banks, institutional investors, hedge funds, trust companies, mutual funds and insurance companies as well as third-party marketers and distributors of financial products.
Under the proposed agreement, DTCC will acquire 100 per cent of the ordinary shares in LCH.Clearnet in exchange for DTCC voting shares, shares in the vehicle acquiring LCH.Clearnet, which carry rights to receive LCH.Clearnet future profits available for distribution for up to three years, and a pre-closing special dividend from LCH.Clearnet.
Assuming no changes in share count, the total number of new DTCC voting shares issued to LCH.Clearnet shareholders will be 12,186, representing 34 per cent of DTCC's enlarged share capital. The terms of the definitive agreement remain subject to completion of satisfactory due diligence.
The combined group will follow DTCC's existing practice of regular mandatory rebalancing of its shareholder base to ensure that share ownership is in line with usage. Within 12 to 18 months of the completion of the merger, it is intended that there will be a rebalancing among the former LCH.Clearnet shareholders to bring ownership fully into line with usage.
Following the payment of all deferred consideration to shareholders, which is expected within three years, LCH.Clearnet HoldCo will move to the same at-cost based service delivery model as that operated by DTCC.
Following completion of the merger, all of the combined group's European business will be brought under common management. Following resolution of commercial, legal, tax and regulatory issues, it is intended that DTCC's existing European subsidiary, EuroCCP, will join with the LCH.Clearnet HoldCo to form a single European clearing business.
The partners expect to be able to sign definitive documentation and announce the detailed terms of the transaction by March 15, 2009. The transaction is conditional on consultation with the works council in LCH.Clearnet's French subsidiary, shareholder approval, and the approval of relevant regulators and certain tax authorities, as well as mutual due diligence.
'The critical role and value of clearing houses has been highlighted by recent events,' says LCH.Clearnet chairman Chris Tupker. '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.
'For our shareholders, the merger would offer the opportunity of receiving a substantial consideration. Furthermore, it would enable both the European and US financial communities to benefit from the services of a user-owned, user-governed, at-cost model across a broader range of markets and asset classes.'
DTCC chairman and chief executive Donald F. Donahue adds: 'By combining DTCC and LCH.Clearnet's natural synergies and complementary skills, we expect our customers will not only see significant cost savings in the clearance and settlement of the many securities and instruments we already service, but also greater access to a more diverse range of product offerings and support of emerging asset classes. A good example is the potential to leverage the expertise between Swapclear's support of interest rate derivatives and Deriv/Serv's capabilities in credit default swaps.'
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