LSE Set To Create Another European Vertical Silo

Despite having criticised the anti-competitive nature of the so-called ‘vertical silo’ model in the past, the London Stock Exchange now looks set to embrace the business model adopted by other US and European exchanges with its proposed takeover of LCH Clearnet.

The independent clearing house has confirmed that it is now in exclusive discussions with the London bourse after its board opted for LSE’s €21-a-share bid over a rival bid from Markit.

Earlier this year, the LSE suffered a major setback when its bid to merge with Canadian bourse TMX fell apart after failing to attract the support of shareholders. In light of the planned merger between NYSE Euronext and Deutsche Boerse, it has been considered crucial that the LSE shores up its position in the marketplace by making further acquisitions.

However, its decision earlier this month to bid for a clearing house is at apparent odds with comments made by LSE executives in the past. As recently as last month, Kevin Milne, head of post-trade services at the LSE, was quoted as saying the bourse remained critical of the vertical silo model.

But with the Deutsche Boerse/NYSE merger—which will effectively combine two vertical silos into an even larger one—pressing full steam ahead, perhaps LSE chief Xavier Rolet felt the LCH Clearnet tie-up was an obvious next step in the LSE’s bid to remain competitive. Indeed, he was quoted last year as having said that the “days of the horizontal model are numbered”.  Rolet, however, added that any combination of exchange and clearing house should not be “hermetically sealed”, and that exchange users should be free to use alternative clearing service providers.  The exchange does not support a closed vertical silo model, an LSE spokesperson told IndexUniverse.eu.

Others, however, remain fiercely resistant to the vertical model in principle. In an interview with Index Universe earlier this year, Alasdair Haynes, chief executive of equities exchange Chi-X Europe, said: “There is a risk in Europe that we will end up with several vertical exchange/CCP silos, which would be disastrous for the industry.”

When asked for comment on the LSE deal, a Chi-X spokesperson said today: “We believe very strongly in the horizontal model and this is clearly a sign that the LSE is pursuing the vertical silo model, which we do not support.”

These views are apparently shared even by some of LCH Clearnet’s own shareholders—according to a report in The Times this week, the investment banks that own LCH Clearnet have themselves expressed concern over the pricing power the merged entity would have and had been pushing the LSE to commit to a fees cap before lending their support to the takeover.

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