Citi analysts have tipped Euronext to continue its expansion into the clearing services space following its purchase of a 20% stake in EuroCPP.

The exchange group, which runs stock markets in Belgium, France, the Netherlands and Portugal, announced it was buying a fifth of the cash equities clearer last week for €14m.

“We welcome to addition of EuroCCP to Euronext’s operating network," Owen Jones, a London-based equity analyst at Citi, said in a note on Monday.

“The company believes that the post trade environment is becoming increasingly complex and that customer requirements are evolving with it.

"The minority stake acquisition by Euronext represents the first of further clearing services diversification, we believe."

As part of the deal, Euronext plans to offer clients clearing choice based on a preferred CCP model of engagement.

In practice, if two trading members agree to clear their trade through EuroCCP, the trade will be directed to it.

The default option, i.e. if one side of the trade cannot direct trades to EuroCCP, will remain LCH.Clearnet.

Citi's note says Euronext believes that EuroCCP will offer trading members with a significantly cheaper clearing option: frictional cost per contract of 1.4 cents vs. 6.6 cents currently with LCH.Clearnet.

It is expected that EuroCCP will cater to Euronext’s cash market clearing requirements; derivative clearing options are being investigated.

“We believe the additional choice will prove to be popular with its customer base," Jones added. 

“The frictional and operating cost reductions, in particular, should be well received and, on that basis, the revenue targets appear unambitious, if anything."

Euronext is targeting €8m of additional revenues from the EuroCCP undertaking by 2019.

Led by Diana Chan, EuroCCP clears equities, depositary receipts and ETFs in 19 national markets, including the US.

Current owners include ABN Amro Clearing, Bats Europe, DTCC and Nasdaq. Each will own a fifth of the business when Euronext joins.

In 2015, EuroCCP generated revenues of €23m and profit before tax of €6m.

“Adjusting for Euronext’s 20% stake, the acquisition equates to a P/E multiple of ~15x, which we believe is well within the expected valuation range for a CCP transaction,” Citi’s note added.