Rainbow in talks with LSE over EDX

Rainbow in talks with LSE over EDX

Rainbow - the European exchange being set up by investment banks - has approached the London Stock Exchange about taking over the bourse's EDX derivatives business and making it the basis of its new trading platform.

In a statement, the LSE says it "has recently been approached by Rainbow to assess how EDX might be used to provide it with derivatives market services".

According to press reports, Rainbow's backers - which include Barclays, Deutsche Bank, Goldman Sachs, JPMorgan, MF Global, NewEdge and UBS - are looking to take control of EDX and use it as the new market's trading platform.

The move would speed up the launch of Rainbow as EDX already has recognised exchange status in the UK as well as established clearing through LCH.Clearnet.
The possible deal would also result in the new exchange becoming a strong competitor to Nyse Euronext's Liffe market, as well as other derivatives exchanges.

But the LSE has warned that any arrangement with Rainbow faces complications after LCH.Clearnet agreed to set up a special clearing unit, called Liffe Clear, within its business.

The move will protect Liffe - the CCP's largest customer - from rivals such as Rainbow by preventing cross-exchange margining on Liffe contracts.

"The potential for LCH.Clearnet to prevent effective competition with Liffe by conceding a special, segregated clearing arrangement has moved the goal-posts a very long way," says the London exchange in a statement.

Reports suggest Rainbow's backers could appeal to UK and European authorities if the deal between Liffe and LCH.Clearnet is formalised before the new exchange launches.

The LSE set up EDX in 2003 with Scandinavian stock exchange operator OMX after losing out to Euronext in a battle to acquire Liffe. But in 2005 the exchange took a goodwill impairment charge of £23.1 million and said it would stop investing in the venture after it struggled to make any significant headway.

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