UPDATE 3-UK clears LSE plan to buy LCH Clearnet

Fri Dec 14, 2012 10:24am EST

(Re-writes first paragraph, adds shares, background, analyst quote)

By Chris Vellacott

LONDON Dec 14 (Reuters) - Britain's competition watchdog has cleared the London Stock Exchange's planned purchase of clearing house LCH.Clearnet as both parties hammer out new deal terms to reflect rising capital requirements.

The Office of Fair Trading on Friday gave its unconditional approval, clearing what was viewed as the biggest regulatory hurdle to the proposed 600 million euro ($785 million) tie-up.

The timing of the deal is still unclear, however, as both parties are back in talks over terms to reflect higher capital requirements being imposed on exchanges by European regulators overhauling the financial system after the banking crisis.

LSE shares moved more than 4 percent higher, which analysts attributed to investors being reassured that discussions were continuing over terms.

"Maybe people believe for some reason those discussions are going better than expected," said Mark Thomas, analyst at Edison Investment Research.

Clearing houses sit between trading firms and ensure trades of securities such as stocks and bonds are completed, holding cash to refund firms left out of pocket by a counterparty default.

They have taken on greater importance since the collapse of Lehman Brothers four years ago and regulators want to force more trading through such vehicles to ensure smoothly functioning markets even at times of stress.

POTENTIAL CHANGES

The LSE said on Friday it was still in discussions over "potential changes to the commercial terms of the transaction" on account of new recommendations from European regulators.

A source close to LCH.Clearnet said the talks were at a "sensitive stage".

Under the deal terms agreed in April, the LSE would buy up to 60 percent of the clearing house for 19 euros per share.

"I think both parties want the deal to go through so something will be arranged ... My guess is that the LSE will get something but probably not the full amount of the additional cost that they'll have to bear," said James Hamilton, an analyst at Numis Securities.

The European Securities and Markets Authority may not finalise its demands until early next year and only then will the LSE know by how much it must renegotiate the terms of its LCH takeover.

Analysts expect LCH's capital shortfall will be less than early estimates and should come in at about 220 million euros.

The LSE would only need to pay 60 percent of that, but that would still leave it on the hook for at least 100 million euros, which its shareholders will want factored into the terms of the LCH takeover.

LCH.Clearnet shareholders include nearly 100 of the world's largest trading banks and two exchanges, the London Metal Exchange and NYSE Euronext.

LSE shares were up 4.5 percent at 1,055p by 1521 GMT, after rising as high as 1,061p, their highest since late September. ($1 = 0.7641 euro) (Editing by Hans-Juergen Peters and David Holmes)