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September 1, 2011 12:57 pm
Europe’s competition authorities have issued a second questionnaire to market participants on the proposed combination of Deutsche Börse and NYSE Euronext as Brussels intensifies its probe of the deal.
The document focuses on derivatives, asking for responses to 98 questions. Many are aimed at teasing out differences between the uses – and cost of using – listed versus over-the-counter (OTC) derivatives.
The first questionnaire was sent out in June, and surprised market participants by its detail and antitrust officials’ command of the complex issues involved, such as clearing and the differences between listed and OTC markets.
One question in the latest document, obtained by FT Trading Room, asks for the extent to which standardised OTC contracts could be executed on an exchange or electronic trading platform “in the same manner as OTC”.
“In other words, are these contracts directly substitutable to some ETDs [exchange-traded derivatives]?”
Critics of the proposed Deutsche Börse-NYSE Euronext deal – including the London Stock Exchange and Icap, the interdealer broker – argue that the combination would create a near-monopoly in financial futures, making it hard for competitors to make inroads in such markets.
The combination of the two groups would bring together the Börse’s Eurex platform, which dominates trading of European government bond futures, and NYSE Liffe, run by NYSE Euronext, and which dominates trading of short-term interest rate futures.
Deutsche Börse and NYSE Euronext argue that derivatives traded in the OTC markets would continue to provide significant competition to any merged Eurex-Liffe market. They also say such competition would be intensified as OTC derivatives move on to formal – likely electronic – trading platforms as required under the Dodd-Frank act in the US and once Europe’s equivalent reforms – enshrined in a review of the Markets in Financial Instruments Directive (Mifid) and the European Market Infrastructure Regulation (Emir) – are in place.
Friday sees the first meeting since the summer break of bureaucrats in Brussels and policymakers on the Emir proposals, as a meeting takes place under the auspices of the Polish presidency of the EU.
In the questionnaire, Commission competition staff ask detailed questions about OTC Flex, a service offered by Deutsche Börse that allows traders to clear OTC derivatives that are economically similar to listed derivatives – such as OTC equity options – through Eurex Clearing.
It also asks about B-Clear, an OTC clearing and trade registration service run by NYSE Liffe.
Another question addresses whether respondents believe there are any regulatory or other limitations on any particular type of user of derivatives contacts. A further question asks whether there are any limitations on the ability of derivatives exchanges outside Europe “to offer services to European investors”.
However the scope and detail required in the responses is causing many market participants headaches.
One question asks: “Please indicate the total cost of trading €1m notional amount of an interest rate future/forward on exchange versus in the OTC market (when the contract is providing the same economic exposure regardless of the execution mechanism) by quantifying the different cost categories associated with the execution mechanism.”
Many respondents also complain that the Commission has not allowed enough time to answer the questionnaire, given what they say is a tight deadline for completion. Responses are due on Friday, although some market participants have secured an extension until Monday, one senior industry official told FT Trading Room, adding that he had received the questionnaire on August 24.
“We’re only able to answer about a third of the questions within the time frame,” he said. “It’s been tricky for everybody.”
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