Euronext owns 80% of Clearnet and 17% of LCH, following its takeover of the London International Financial Futures Exchange. The agreement to merge the two follows a protracted three-year courtship and prolonged negotiations over regulatory and pricing issues.

The new company is valued at EUR1.2 billion and is expected to generate cost savings of about EUR35m annually by 2007. Duplicate technology investments amounting to EUR23 million will also be avoided. LCH.Clearnet has set itself a target of EUR150 million in annual earnings, with a generous 50% dividend on profits.

"We believe that users will, over time, see substantial benefits as we migrate to a single platform with a harmonised rulebook, a common technical interface and substantially increased opportunities for netting," says LCH chairman Sir Michael Jenkins.

Euronext will be the largest shareholder in the merged group with 45.1%, but will hold less than a quarter of the voting rights, with the remainder held by an independent third party.

LCH chief executive David Hardy will lead the new company, with Clearnet CEO Patrice Renault as his deputy. Former Axa CFO Gerard de la Martiniere will be chairman of the board

The deal will turn attention once again to the London Stock Exchange and its views on the consolidation of trading and settlement across Europe. Having already been outmanoeuvred by Euronext in the bidding for Liffe, analysts will be looking for a clear signal from the LSE on its future strategy.

By late-afternoon LSE had issued a statement saying that it intended to renegotiate its clearing services agreement with LCH and to look at possible alternative providers. The Exchange is understood to be looking for documented assurances on independent governance and fee-capping under the new regime.