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LSE bets on extension of deal allowing EU access to UK derivatives clearing

London Stock Exchange Group PLC boss David Schwimmer said he expects an extension to the the temporary agreement that allows European Union customers to use its London derivatives clearing house until next March in a no-deal Brexit.

The exchange's LCH Group Holdings Ltd. business clears between 90% and 95% of the world's interest rate swaps, said group CFO David Warren. About 90% of the world's euro-denominated interest rate swaps, used by companies across Europe to insulate themselves against rate changes, are cleared through London.

Although the British government reached an agreement with the EU on the terms of Brexit on Oct. 17, that agreement has yet to be passed by the House of Commons. A vote, likely to be extremely close, is scheduled for Oct. 19. The country is due to quit the EU on Oct. 31.

"With respect to European market participation of LCH, that goes until March 2020. We expect that this will be extended. We think there is a recognition amongst all market participants of the systemic importance of this market. The message we have got is that nothing is likely to be clarified until after 31 October. We expected the same recognition that was granted in December last year to be extended, probably in November but there's no guarantee on timing," said Schwimmer.

In its trading statement, LSE said total income on a constant currency basis for the third quarter rose 10% to £587 million, driven by a 22% increase in revenue growth at LCH. Total income on a constant currency basis for the nine months to Sept. 30 rose 7% to £1.78 billion.

Commitment to Italy ops and Refinitiv deal

The exchange also announced plans to consolidate its clearing and settlement businesses in the U.K., France and Italy into a single post-trade division. Daniel Maguire, CEO of LCH, will lead this division while the governance and management processes will remain unchanged. There has been considerable speculation in Italy that LSE was planning to move senior jobs to London.

"We are not moving business [out of Italy]," said Schwimmer.

He also commented on the planned $27 billion acquisition of data and financial analytics group Refinitiv US Holdings Inc. This is the deal that the Hong Kong Exchanges & Clearing Ltd. planned to crash with its own, now dropped, £32 billion offer for LSE.

LSE has appointed integration specialist David Shalders as chief integration officer to oversee the integration of Refinitiv. He will join on Nov. 18 from Willis Towers Watson where he led the integration of Willis and Towers Watson.

Schwimmer said the company was making good progress on the Refinitiv deal and on the preliminary process to gain regulatory approval while a circular for a shareholders meeting in November is expected to be released shortly.

"We remain on target to close the transaction in the second half of 2020," said Schwimmer.

Bridge loan for acquisition

Warren, who will step down at the end of 2020, commented on the bridge loan that LSE is using for its Refinitiv deal. The loan is intended to be taken out entirely in bonds but not until the fourth quarter of 2020 or first-quarter of 2021.

"It is a Libor-based price on an increasing ratchet as it is intended to be short-term financing. We expect to replace that bridge with permanent financing," said Warren.

The loan refinances $13.5 billion of leveraged loans and bonds that backed the $20 billion purchase of a majority stake in Refinitiv last October by a consortium led by private equity firm Blackstone Group Inc.