The London Stock exchange, which has itself in the recent past been rumoured to be a potential take-over target, has said that it is in early discussions to buy LCH.Clearnet, Europe’s last independent clearing house.

A clearing house such as LCH.Clearnet is the body that stands between the buyer and the seller and guarantees that the deal will go through. This makes clearing houses extremely important in the day to day running of an exchange.

It also makes an exchange that owns and controls its own clearing house more cost effective and efficient.

As the LSE has started dabbling in derivatives market and wants to expand into that business there will be more business so more clearing will need to be done. It therefore makes business sense to bring clearing in-house. Although the LSE already owns CC&G clearing house in Italy after its 2007 take-over of the Milan Stock Exchange, LCH.Clearnet’s SwapClear is considered as the market leader.

These discussions follow on from denials in May that the LSE was then talking to LCH.Clearnet as well as Markit and Nasdaq OMX also being interested.

As the LSE’s recent moves to merge with the Canadian stock exchange TMX failed, a purchase such as this may be the next best thing.

But Hester Plumridge writing in the WSJ says that the LSE may end up paying dearly for LCH.Clearnet. ‘LSE may be able to take out costs and improve performance, not least through using its Millennium software at LCH. But in a world where the LSE has watched as other exchanges bulk up, investors should beware it overpaying in a bid to catch up.’

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