(Removes reference to BATS Chi-X Europe in ninth paragraph following clarification from company)
* Combined group would have about a third of the market
* Move follows LSE taking controlling stake in LCH.Clearnet
By Huw Jones
LONDON, March 14 (Reuters) - Two European clearing houses, whose services underpin share trading, will merge to better cope with tougher competition and provide the fee cuts users demand as volumes dwindle in a sluggish economy.
EMCF and EuroCCP, which announced the deal on Thursday, would have a combined market share of around 35 percent in clearing on exchange trades, according to calculations based on Federation of European Securities Exchanges industry figures.
A central counterparty or clearing houses stands between the two sides of a trade, backed by a default fund to complete the trade if one side of the deal goes bust.
The combined group will be tougher competition for rivals such as Eurex Clearing, part of Deutsche Boerse, and LCH.Clearnet, in which the London Stock Exchange is buying a controlling stake.
“The new CCP will lead the way in encouraging greater competition between all cash equity clearing houses while driving down costs,” EuroCCP CEO Diana Chan, who will head the merged company, said in a statement that gave no figures on the deal.
The combined entity will take the EuroCCP name and will have its headquarters in Amsterdam, where EMCF is based. Jan Booij, currently head of EMCF, will be chief operating officer after a deal that still needs the green light from regulators.
Users will benefit from “substantial settlement cost savings”, reduced collateral obligations and cheaper connectivity fees, the statement added.
Analysts said more consolidation in clearing was inevitable in order to achieve economies of scale, as market participants rethink business models because of tougher regulation and volumes are thinned as a slow economy dampens trading.
EuroCCP, owned by the U.S. Depository Trust and Clearing Corporation, has suffered a string of annual pretax losses.
EMCF, owned by Dutch-based ABN AMRO and the Nasdaq OMX exchange, saw income fall sharply last year, hit by new rules allowing competition among clearers.
“In light of the fall in volumes in Europe, I think all market participants are looking at their role in the marketplace and (trying to) establish how they can survive,” said Rebecca Healey of consultancy TABB Group. “You are going to see more of the same. It’s efficiencies of scale people are going to have to move to.”
Axel Pierron, an analyst at consultancy Celent, noted the European Union wants streamlined market infrastructure for clearing and for settlement, the final leg in a trade where cash is exchanged for ownership.
“More will happen in the post-trading industry in Europe, not only around the issue of scale and declining volumes, but also around regulation,” Pierron said.
The consolidation in share clearing contrasts with a growing fight among incumbents and new entrants to clear derivatives transactions, seen as a key moneyspinner in coming years.
The European Central Bank is building a single securities settlement platform for the euro zone. (Editing by David Holmes)