Source: Wall Street Journal                            Date: 08 September, 2011

The London Stock Exchange's (LSE) attempt at horizontal expansion may not go unpunished. The renowned market has strained to acquire its own clearinghouse, but at great risk, reported the source. The LSE is one of three markets where Mongolia's Erdenes Tavan Tolgoi may list.

The LSE is in talks to purchase a major stake in LCH.Clearnet. However, LCH is Europe's sole independent large clearing house and is thus widely pursued. Paying a heavy bid many not be wise. Especially when the LSE is in current pursuit of expanding vertically by merging with Canada's Toronto Stock Exchange (TSX).

The advantages of a market owning its own clearing house are numerous. Economically it is more efficient to do business with one's self than a separate entity. Customers of the LSE would be encouraged to use its own clearinghouse, likely with discounts. Clearing and settlement currently accounts for less than 15 percent of the LSE's global revenue, but if it were to have its own larger clearing business, it could rise as high as 50 percent.

Although the LSE may be able to improve the performance of LCH and improve economic efficiency with its own clearinghouse, the market should learn from other exchanges which have fallen in their attempts to bulk up.