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New LSE boss in 438m-euro move to tighten hold on clearing business

THE London Stock Exchange tightened its grip on derivatives clearing on Friday in a sign of growing confidence that the threat of losing chunks of business to European Union rivals after Brexit was receding.

In the first major move by the exchange's new chief executive David Schwimmer, the former Goldman Sachs banker who took the reins in August, the LSE said it was spending 438 million euros (S$692 million) on increasing its stake in clearing house LCH by 15.1 per cent to over 80 per cent.

The transaction, which will be funded from cash and existing debt facilities, will add to earnings per share following completion, expected before the end of 2018, LSE said.

"This reflects our confidence in LCH for continued growth," the exchange's chief financial officer, David Warren told an analyst conference call.

LSE shares were up 0.9 per cent at 4,324 pence at 0900 GMT, bucking a weaker trend in the broader stock market.

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LCH is one of the world's top clearing houses for derivatives, but its dominance in euro denominated transactions has led to calls for that activity to be relocated to the single currency area after Brexit.

LCH also faces the threat of being locked out of the EU market when Britain leaves the bloc next March if a no-deal Brexit puts the legality of cross-border derivatives contracts into question.

Mr Warren, however, said he was encouraged by recent meetings with regulators and central bankers who are looking at potential disruption to so-called contract continuity. "We think there is a new urgency about getting solutions and legal certainty in the very near future, and it's very clear our customers want continuity of service," he said.

A working group lead by the European Central Bank and Bank of England on market risks from Brexit is due to report its initial findings in coming days.

The LSE has a clearing unit in Paris, but Warren said customers don't want the exchange to apply for a licence there to handle the euro clearing currently being done in London.

LCH would need to serve notice on EU customers by December if it felt it could not continue clearing their transactions in London after Brexit, but exchange officials said on Friday they have no plans to do this in a further sign that the threat of disruption has receded.

Rival Deutsche Boerse in Frankfurt is stepping up efforts to attract LCH business from London but volume so far is small.

Mr Warren played down the threat, saying euro-denominated business transacted by EU customers accounted for just 7-14 per cent of LCH overall activity.

Nevertheless, the LSE, which also owns the Milan Exchange, has applied for a licence in Amsterdam to operate its Turquoise pan-European share trading service. The LSE said that total income from continuing operations rose 8 per cent to £522 million (S$936 million) in the quarter ended Sept 30, below analysts' estimates of £530 million.

Mr Warren said an accounting rule change dampened revenue and income figures in the exchange's capital markets unit. REUTERS

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