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LSE clarifies clearing cost savings comments

The London Stock Exchange Group has been forced to admit it has not yet worked out potential capital savings to users from its proposed merger with Deutsche Börse – the second clarification related to the deal it has had to make this week.

On April 27, the LSE filed a regulatory news statement to clarify that potential capital savings to users resulting from the deal had not yet been clarified. The Financial Times reported on March 8 that the two exchanges were set to promise users capital savings of up to $7 billion from the merger.

Such savings would most likely arise from bringing together the two group’s clearing houses – the LSE-controlled LCH.Clearnet and the Frankfurt-based Eurex Clearing.

Eurex and LCH are among the leaders in the clearing of longer-dated futures and over-the-counter swaps, respectively. Bringing them together could enable customers to reduce the collateral they hold against correlated futures and swaps contracts through a process known as “portfolio margining”.

When the deal was formally announced, Carsten Kengeter, chief executive of Deutsche Börse and CEO-elect of the new group, said the exchanges planned to “develop a portfolio margining service between OTC and listed rate derivative clearing markets, providing significant customer benefits through margin relief and cost-of-capital savings”.

On a first-quarter earnings call on April 27, one analyst asked the LSE about the potential for regulatory capital relief from the merger, specifically referring to capital savings of $7 billion related to portfolio margining.

In response, David Warren, the LSE’s chief financial officer, said: “I think with respect to the portfolio margining and the number that you referenced, that is something that has been announced.”

However, in its statement on April 27, the LSE said: “These potential benefits have not been quantified at this stage.”

It is the second time the LSE has been forced to make clarifications in a week. On April 25, it issued a statement on recent comments made by its CEO Xavier Rolet in the press regarding Intercontinental Exchange, which has indicated it may make a rival bid for the UK exchange.

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