CME CME Group Inc

By Shayndi Raice, Tim Cave and James Rundle 

The most coveted asset owned by the London Stock Exchange Group PLC could also be what brings down any deal to buy it.

A potential bidding war for LSE emerged Tuesday between Intercontinental Exchange Inc., CME Group Inc. and Deutsche Börse AG. Analysts agree that any of the three buyers would have to persuade authorities that a combination of their clearinghouse businesses with LSE's can pass antitrust muster.

LSE's clearinghouse business, LCH.Clearnet, is the dominant clearinghouse for interest-rate swap derivatives globally and the part rivals want most.

Clearinghouses are supposed to help prevent a marketwide collapse by ensuring that trading partners get paid even if one of them defaults.

ICE said Tuesday it was considering bidding for the U.K. exchange, a week after Germany's Deutsche Börse said it was pursuing a merger with LSE. CME Group is also considering a bid, according to a person familiar with the matter.

European regulators have traditionally been concerned about an exchange becoming too large in any of its business lines, for fear that pushes up fees for customers. Trade clearing businesses are also systemically important, meaning regulators will carefully assess one party amassing too much power or housing too much risk.

Both Deutsche Börse and ICE own derivatives clearinghouses. But Deutsche Börse's focuses on listed products, while LSE's focus is on over-the-counter swaps. ICE's European clearing operation, ICE Clear Europe, is dominant in credit, energy and commodity derivatives, which also includes financial futures, after its purchase of NYSE Euronext's Liffe exchange.

CME in the U.S. accounts for around 40% of swaps clearing, with the remainder processed by LCH. CME has made a push into Europe in recent years with the opening of a derivatives exchange, CME Europe in 2014, and a clearinghouse in 2011.

Because of the overlap, some analysts believe problems could arise with any bidder.

"On the clearing side, any combinations with the LSE would, I believe, gather some close scrutiny," said Richard Repetto, an analyst with Sandler O'Neill + Partners LP.

But from a political perspective, a deal with Deutsche Börse and LSE could appease European regulators who want an exchange powerhouse in Europe.

Another political plus for a German and U.K. tie-up is that it would create the largest equity market operator in Europe, unseating Bats Europe, which leads exchanges by value traded. Bats' market share of EU equity trading by value was 21.19% in February, while the LSE's was 17.69%, and Deutsche Börse's 9.5%, according to figures from Bats.

Since the financial crisis, regulators have promoted clearing in derivatives markets, particularly in interest rate swaps, since it is designed to reduce the risk of defaulting on a trade. Some analysts believe the deal could give regulators an opportunity to push ICE to provide open access, allowing market participants and rivals access to its index, data, clearing and other products through commercial partnerships.

The European Commission blocked a deal between Deutsche Börse and NYSE Euronext in 2012 over concerns it would create a quasimonopoly in European derivatives traded on exchanges.

But Spencer Mindlin, an analyst with Aite Group, thinks the industry may now have enough competition to warrant some consolidation.

"There are plenty of competitors, he said. "That competition didn't necessarily exist five or 10 years ago."

Write to Shayndi Raice at shayndi.raice@wsj.com

(END) Dow Jones Newswires

March 01, 2016 15:39 ET (20:39 GMT)

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