D Börse and NYSE Euronext tie-up faces probe

Plans to create the world’s largest exchanges group by combining Deutsche Börse with NYSE Euronext are to be submitted to an in-depth probe after European antitrust authorities raised “significant concerns” over its dominance in derivatives trading.

The move came after Brussels launched an initial investigation in June into the planned $10bn tie-up, which would create a transatlantic group larger than the CME Group, ICE or Nasdaq OMX in the US, as well as the London Stock Exchange.

It also marks the first time that exchange ownership of the crucial post-trade business of clearing in a so-called “vertical silo” has come under antitrust scrutiny in Europe.

Deutsche Börse owns its own futures exchange – Eurex – and clearing house, a position that would be strengthened with the addition of NYSE Euronext’s Liffe futures exchange, based in London.

Banks, which are among both exchanges’ biggest customers, have expressed concern about what they say is the increased market power in derivatives trading and clearing. Derivatives generate significantly more profits for exchanges than share trading.

A combined Eurex and Liffe would give the group a combined share of almost 95 per cent of exchange-traded derivatives.

The commission said: “At this stage, [we are] mainly concerned that due to the removal of an important competitor, the merger would have a negative impact on innovation in derivatives products and technology solutions.

“Moreover, the possibilities for fee competition may be reduced due to increased difficulties for competitors to enter the market. Customers who could be affected by this include pension funds, mutual funds and retail banks, as well as professional brokers and investment banks.”

Brussels said its investigation had revealed concerns that without access to the merged company’s enlarged clearing facilities – “ie: in the presence of a closed ‘vertical silo’” – entry by rival derivatives platforms would be made more difficult in a market already characterised by high barriers to entry.

It also singled out concerns over equities trading and settlement, and index licensing. That refers to the ownership by exchanges of companies that compile stock indices, such as Deutsche Börse’s ownership of the Stoxx index company.

Joaquín Almunia, EU competition commissioner, said: “The Commission needs to make sure that markets which are at the heart of the financial sector remain competitive and efficiently deliver to users.”

Deutsche Börse and NYSE Euronext argue that their derivatives combination would face significant competition from over-the-counter (OTC) derivatives markets, including when such instruments are shifted on to formal trading systems, as required under the Dodd-Frank act and similar reforms working their way through Europe.

“[We] remain confident that [our] planned combination will be approved,” they said. It would “bring together two complementary derivatives businesses, giving them the scale and depth to compete effectively in a global industry with many powerful participants – exchanges, OTC platforms, banks and clearers – and to keep pace with increased competition driven by technology and regulatory changes”.

Both exchanges have won overwhelming shareholder support for the deal, with Deutsche Börse saying this week it had received 95 per cent acceptance rate from its shareholders.

Brussels has 90 working days to complete its probe.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.