European regulators probing the potential merger of Deutsche Börse and NYSE Euronext have sent an unusually wide-ranging questionnaire to the exchanges’ rivals, in a further sign authorities are looking more closely at the potential effects of reduced competition in equity and derivatives trading and clearing.
The survey of 175 questions was sent out by the regulators for the European Commission probing the potential merger of the German and US exchange, which, if approved, would create the largest corporate listing venue in the world.
The size and scope of the survey lends further credence to an emerging view in the industry that watchdogs are watchdogs are taking a more muscular approach to exchange mergers.
The industry has largely escaped tough scrutiny, even amid the last wave of mergers about five years ago when the New York Stock Exchange acquired Euronext and CME Group of the US bought Chicago Board of Trade and the New York Mercantile Exchange, transforming both companies into two of the world’s largest exchanges operators.
However antitrust authorities around the world have stepped in to play increasingly decisive roles in ending the potential mergers of Nasdaq OMX and NYSE Euronext, and the bid by SGX Group, the Singapore exchange, for ASX, its Australian counterpart. There was also surprise at a decision last month by UK regulators to refer the proposed acquisition of Chi-X Europe, a share trading platform, by BATS Global Markets, a US-based operator of similar platforms, to antitrust authorities.
“The questions that are being asked are good. They are thorough and are designed to flush out both sides. It’s well done, I have to say,” said a spokesperson of rival, who declined to be identified.
Among the issues the questionnaire has focused on include the factors users take into account for trading on a particular venue, with questions on implicit and explicit fees charged, transparency and collateral requirements.
It also asks whether multilateral trading facilities could establish themselves in the derivatives market and whether CME Group had the ability to become a significant player in the trading and clearing of European derivatives.
“To the extent that all (or the significant majority) of trades in a certain category of derivatives concentrate on one exchange, please explain to what extent an alternative exchange is a credible competitor or potential competitor to that exchange for that category of derivative,” one question asks.
Indications from Brussels have suggested regulators would be scrutinising the deal far more closely than others in recent years. Tatjana Verrier, head of the financial services antitrust unit at the European Commission’s directorate-general for competition, said last month that exchanges had been “disregarded” for a long time.
The deal in part rests on European regulators’ attitude to the so-called vertical silo, by which an exchange controls both trading of derivatives and post-trade services, such as clearing and settlement. Critics have argued it could give exchange operators the power to lock out competitors from lucrative contracts and have sought reassurances over access.
“In your view, would there be, in the absence of the merger, a realistic prospect that another derivatives exchange would be able to gain access to fungible clearing of the same instruments traded on (a) Liffe and (b) Eurex,” another question in the survey said.
In March Joaquin Almunía, EU competition commissioner, expressed his doubts about the “vertical silo” model that the deal would create.
Under Brussels’ rules, the review of the Deutsche Börse-NYSE deal is a two-step process: it can either be cleared within 25 working days or move to a fuller investigation, in which case a decision is required within a further 90 working days.
However the deadlines can be extended and the parties can offer commitments to address officials’ concerns during the process.
A merger of Deutsche Börse and NYSE Euronext would create the dominant market for trading and clearing of derivatives in Europe. It would also create a company with about 30 per cent of trading in cash equities in the region. Shareholders are due to vote on the merger on Thursday.