EC launches in-depth probe into Deutsche Börse-LSE deal

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European competition regulators have opened an in-depth probe of the UK exchange’s planned merger with its German rival

The Commission had been undertaking an initial review of the merger since August 25, during which time questionnaires were sent to market participants to gather feedback.

In a move that had been widely expected, the Commission confirmed in a statement on September 28 that the landmark tie-up would now move to a “phase II” in-depth competition probe that could last up to 90 days. The Commission has until February 13, 2017 to make a decision.

In a statement, the EU’s competition commissioner Margrethe Vestager said: “We must ensure that market participants continue to have access to financial market infrastructure on competitive terms. Therefore, we have opened an in-depth investigation to assess the proposed merger.”

Many had expected the deal to raise potential competition issues around indices, data and cash equities trading, as well as derivatives and clearing.

The Commission confirmed on September 28 its initial review had given rise to preliminary concerns in six main areas: clearing; derivatives; repurchasing or repo agreements; German stocks; exchange-traded products; and other sectors including interdealer electronic trading of German government bonds and regulatory and trade reporting.

The merger would bring together two of Europe’s largest clearing houses in the shape of Deutsche Börse’s Eurex and LCH.Clearnet, the dominant clearer of OTC swaps in which the LSE has a controlling stake.

On clearing, the Commission said it had preliminary concerns the tie-up would eliminate competition in a number of areas, “including bonds, derivatives and repos”, as well as “adversely affect competing trading venues that depend on clearing services provided by [LCH]” .

Euronext is one of the exchanges that relies on the French arm of LCH for clearing and it has been vocal in opposing the Deutsche Börse/LSE deal.

The LSE, in its own September 28 statement, said that to address antitrust concerns it would explore a potential sale of LCH SA, LCH’s French-regulated operating subsidiary, which clears primarily for Euronext markets.

Any potential sale of LCH SA would be subject to the review and approval by the Commission, the LSE said.

In derivatives trading, the Commission said it had preliminary concerns the deal “could lead to a near-monopoly in single-stock equity futures and options based on Italian underlying instruments”. Since 2007, the LSE has owned Italian stock exchange operator Borsa Italiana.

The Commission added that both exchanges had “recently set up, or are in the process of launching, competing offerings to each other’s franchises”.

That is a reference to the new futures market CurveGlobal, which is part-owned by the LSE, trades both longer and shorter-dated fixed income futures, and will compete partially with Eurex.

The Commission had “preliminary concerns that their development might be put at risk by the proposed transaction”.

By combining the German Xetra market and Turquoise – the equity trading venue part-owned by the LSE – the Commission added the deal “would combine two of the three largest venues that currently offer trading of German listed equities”. It said it had preliminary concerns the deal “could therefore lead to a significant loss of competition for these types of products”.

Deutsche Börse and the LSE announced they were in talks to merge in February, in a ‘merger-of-equals’ deal that has already seen off a potential counterbid from Intercontinental Exchange, withstood the fallout from the Brexit vote – which raised questions over plans for the company’s holding company to be based in the UK – and received shareholder sign-off.

But regulatory approval was always expected to prove the biggest test, with the deal needing approval from more than 20 regulators, including authorities as far afield as the US, Russia and Singapore.

Approval from Hesse – the federal state regulator for Frankfurt – as well as Europe’s antitrust authorities is expected to be the most difficult to attain.

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