Yesterday, NASDAQ OMX Group Inc. (NDAQ - Analyst Report) culminated the divestment of its U.S.-based International Derivatives Clearing Group (IDCG) to London’s LCH.Clearnet, which is globally the largest interest rate swaps (IRS) clearinghouse. With this acquisition, LCH.Clearnet would be able to extend its operation in the U.S.
The deal was officially agreed in April this year, with LCH.Clearnet issuing a certain number of its shares at a rate of €19 each to NASDAQ. This increased NASDAQ’s stake to 3.7% in the Anglo-French firm. Bloomberg estimated the value of NASDAQ’s ownership to be about €25.8 million. Following this, a subsidiary of LCH.Clearnet, IDCG has been re-baptized as LCH.Clearnet (U.S.) LCC.
While NASDAQ acquired it in 2008, IDCG commenced operations in April 2009 as the company’s over-the-counter (OTC) derivatives clearer in the U.S., primarily in the IRS market.
However, IDCG failed to generate any growth impetus in IRS due to insufficient members and intense competitive pressure from extensive derivative operators such as NYSE Euronext Inc. , CME Group Inc. (CME - Analyst Report) and IntercontinentalExchange Inc. (ICE - Analyst Report) . Subsequently, IDCG was weighing about $10 million or 5 cents per share on NASDAQ’s financials on an annual basis.
Hence, the divestment of IDCG appears to be a viable step for NASDAQ. The divestiture will not only enhance NASDAQ’s presence in LCH.Clearnet but will also help the company expand its reach into Europe as London Stock Exchange (LSE) is expected to buy a majority (about 60%) of LCH.Clearnetfor $1.08 billion by the end of this year. The acquisition will also help NASDAQ to better respond to the changing industry dynamics, while seeking opportunities for gaining scale.
Expanding its derivative index in Europe, in June 2012, NASDAQ announced its plan to build a new interest rate derivative trading platform – NASDAQ NLX – in London. The trading platform is scheduled to debut by the first quarter of 2013. NASDAQ NLX will operate as a separate entity within NASDAQ. However, the launch is subject to regulatory approval from the Financial Services Authority (FSA).
We believe that the IDCG divestment justifies and provides greater clarity to NASDAQ’s European expansion strategies. In the long run, this pro-competition approach amid the financial turmoil in Europe could help NASDAQ attain higher efficiencies and expansion opportunities.
On the other hand, tapping on increased clearing activity opportunity in the U.S. following the financial reforms, LCH.Clearnet aspires to extend the services of its U.S.-based SwapClear IRS clearinghouse through the licensed IDCG.
LCH.Clearnet also plans to facilitate its cross-product margining services with New York Portfolio Clearing (NYPC), Depository Trust and Clearing Corporation (DTCC) and NYSE Euronext along with other OTC clearing initiatives. Subject to regulatory approval, this swap clearing is expected by the fourth quarter of 2012.
LCH.Clearnet looks forward to capitalize on the financial reforms in the U.S. that strictly requires clients to clear their swap products. At such as a juncture, IDCG has come as a relatively low-risk deal. Strengthening its base with IDCG will further help LCH.Clearnet alleviate the anxiety of its clients in the U.S. over it being an international entity, which poses risks related to collateral assets, legal custodian and bankruptcy, thereby fortifying LCH.Clearnet’s position in the US.
Overall though, this is not the first time that NASDAQ has looked to gain a strong foothold in the Europe. Few years ago, the company had built its equities trading platform – NASDAQ OMX Europe, which subsequently turned out to be a failed attempt. Hence, we cast a neutral outlook on the company’s growth attempts and currently remain on the periphery to assimilate the future developments on the path of its European expansion.
NASDAQ carries a Zacks Rank #3 that implies a short-term Hold rating, while the long-term recommendation stands at Neutral.