BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Equities

Quick View: EU’s extra time raises LSE-DB deal temperature

Posted on November 11, 2016

The London Stock Exchange Group and Deutsche Börse are entitled to feel that the extra time Brussels will have to assess their deal is a positive sign.

In extending their deadline by 15 days to March 6, European antitrust authorities will be able to test the market impact of the LSE selling off the French clearing arm of LCH, as it proposes. Interested parties will offer their thoughts when a second round of questionnaires arrives in coming days.

The asset — also known by its old brand name Clearnet — is really only available if Brussels approves the megamerger — and the deal is completed. Divesting the asset has always been likely for deal approval. But is it enough?

The EU’s initial investigation flagged up several areas of concern. The deal could hit competing trading venues that depend on LCH for clearing, such as Paris-based Euronext.

Another concern for the commission is the repo market. It is used for secured short-term funding, and is where banks and corporations can price and source collateral to meet margin requirements for derivatives trades.

The cleared repo market also helped preserve market access for banks for funding from some peripheral Eurozone countries during the financial crisis.

An LSE-DB combination would create an entity with a dominant European position in cleared repo and fixed income trades. One segment, the general collateral triparty cleared repo market, would be particularly affected. Deutsche Börse’s GC Pooling product, backed by the Bundesbank, is really the only available rival to LCH’s €GCPlus, which gives access to the Banque de France.

In theory the merged company could also force its counterparties to settle all cleared repo transactions in Deutsche Börse’s Clearstream settlement house. 

Selling LCH France has always been part of the exchanges’ antitrust tactics — the LSE has long had frustrations that it cannot make some of the cost savings it has wanted to. The LSE’s banker JPMorgan is assessing interest. Likely potential bidders will discover if they are through to the next round in coming weeks. 

Even so, Euronext remains the obvious buyer of an asset it divested in 2003; for growth; to rebuild Paris as a financial hub; and to get a toehold in derivatives clearing.

Analysts at Bank of America Merrill Lynch summed up their third-quarter results this week that: “There’s little to transform the market view on Euronext. Longer term, the company’s success in deploying its M&A potential will be key.”

But more concessions from the LSE and Deutsche Börse may come. For example, the EU flagged up concerns of “a significant loss of competition” in German equities. Deutsche Börse’s Xetra has a 60 per cent market share and the LSE-controlled Turquoise has about 13 per cent. Prising Turquoise away might be painful for the LSE but it is unlikely to be a deal-breaker. There are also rumours that CurveGlobal, the LSE’s new fixed income trading venue, could be up for discussion.

CurveGlobal, Clearnet and Turquoise are all assets from the LSE stable. This is supposed to be a merger of equals. What is Deutsche Börse prepared to part with, and whose deal is this? 

The biggest hurdle is still likely to be in derivatives clearing. Like the repo market, in theory the collateral and margin placed at SwapClear, LCH’s interest rate swaps business, could be diverted to Clearstream. Rules on derivatives mean clearing houses have to leave the margin and collateral they hold for traders at a settlement house.

An offer to sell the minor Eurex OTC clearing business is unlikely to sway the commission. If Brussels decides a link between Eurex’s futures and the LCH’s swaps clearing can crimp competition — or that markets for sourcing and the flow of collateral can be cornered — then it may demand that LCH’s SwapClear or Eurex Clearing be hived off too. And for the exchanges, that will almost certainly be a concession too far.