March 22, 2011 11:29 pm

Deutsche Börse deal faces hurdle

Deutsche Börse’s proposed deal to buy NYSE Euronext could face regulatory hurdles from Brussels after the European Union’s antitrust chief indicated he was not in favour of the business model both companies operate.

Joaquin Almunía, EU competition commissioner, said he had doubts about the “vertical silo” model, an industry term that refers to an exchange that controls both the trading of derivatives and the clearing of them. It could give exchange operators the power to lock out competitors and keep lucrative contracts and revenue in-house.

“From the competition point of view, I tend to prefer models that are not a vertical silo,” Mr Almunía told a European Parliament hearing. “More open competition, more opportunities, this more open business model, together with interoperability from the competition point of view, is preferred,” he said.

His comments represented the first indications from competition regulators on either side of the Atlantic of potential sticking points to the deal. Mr Almunía and the EU have previously said that the “review” would be deep, likely involving a “phase two” inquiry that could take more than a year.

The German and US exchange groups, operators respectively of the Frankfurt and New York Stock Exchanges, last month agreed a $25bn all-share merger that would create a behemoth with four times the revenues of the London Stock Exchange or Nasdaq OMX. Both Deutsche Börse, through its Eurex clearing house, and NYSE Euronext, with its Liffe London futures exchange, have vertical silos. The two exchanges declined to comment. However, observers said the issue was not necessarily sufficient to block the deal.

“Vertical issues are fixable. You enter into a decree that, in this case, commits to a certain degree of openness. Maybe this is some kind of signal that we can look forward to seeing some requirements, but not an outright opposition to this merger,” said Daniel Wall, a partner in the San Francisco office of Latham & Watkins.

Yet the issue of vertical silos has become the centre of a furious lobbying battle at the European Commission in recent weeks as Brussels pushes reforms to clean up the financial system after the crisis.

Market participants such as banks and interdealer brokers have opposed silos because they wield pricing power over them, derived from control of a clearing house that also helps prevent rivals from offering competing products.

US regulators have yet to lay out their own plans for reviewing the merger, but the US side of the deal poses fewer competitive concerns. In the EU, the merger could create a futures exchange with more than 90 per cent market share. The two groups’ US markets have significantly less overlap.

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