NASDAQ OMX Group Inc.
) 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.)
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.
). 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
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
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
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
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.
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