The Depository Trust & Clearing Corporation (New York) and LCH.Clearnet Group (London) have jointly announced that they have signed non-binding heads of terms regarding the proposed merger of the two companies. This merger proposal aims to create the world's leading clearing house, which would operate a user-owned, user-governed model, with LCH.Clearnet moving to an at-cost based structure comparable to DTCC's within three years.
The proposed merger should result in significant synergies and efficiency gains, largely derived from technology savings, as well as significantly enhanced economies of scale. For the first time both the U.S. and Europe would be supported by a common infrastructure. Further reductions in the costs of LCH.Clearnet's and DTCC's services are expected, most notably for equities in both Europe and America.
The combined group would focus on maximizing value to users while ensuring the highest standards of risk management. Its clearing and depository infrastructure would be underpinned by a significant breadth of financial expertise, proven risk management capabilities, volume capacity and market-leading technology solutions.
The range of markets and services covered would be broad and diverse and would include such asset classes as equities, fixed income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and OTC products such as interest rate swaps, credit default swaps, carbon emissions and freight contracts. Clients served globally would include several thousand broker/dealers, banks, institutional investors, hedge funds, trust companies, mutual funds and insurance carriers and other third parties who market financial products.
The management of both entities believe that users would benefit from:
ï¿½' A global at-cost, user-owned, user-governed clearance and settlement infrastructure, dedicated to serving the needs of its users and which, once the cost of operations have been covered, would return excess revenue to users in the form of rebates, discounts or tariff reductions;
ï¿½' Significant anticipated cost savings deriving from: IT synergies; enhanced economies of scale; integrated and efficient collateral management and other operational efficiencies. Initial indications suggest that synergies would amount to approximately 7 percent to 8 percent of the combined group's operating costs;
ï¿½' A transatlantic clearing house of significant financial strength, offering the robustness in processing capacity and operational capabilities required to underpin today's financial markets;
ï¿½' Sophisticated risk management capabilities, the resilience of which has been proven in both companies during the current financial markets crisis.
ï¿½' Access to default funds and potentially increased cross-margining, which maximize the efficacy of members' capital contributions and provide a safeguard in volatile market conditions;
ï¿½' The leveraging of financial services expertise across the group in order to develop innovative, market-leading clearing and settlement solutions for established and emerging asset classes, in partnership with market participants.