EU Said to Warn Deutsche Boerse-LSE Merger May Crush Rivals
European Union regulators told Deutsche Boerse AG and London Stock Exchange Group Plc that their $12 billion deal to create the region’s dominant exchange operator risks eliminating rivals for clearing services, according to two people who’ve seen the statement of objections.
Other clearing operators will have little or no chance of competing against the combined company, the European Commission said in a statement of objections it sent to Deutsche Boerse and LSE last month, the people said on condition of anonymity because the document isn’t public. Regulators say the two companies compete directly for so-called “bundle-to-bundle” integrated clearing services. This sets the bar high for any potential concessions.
Clearing — a back-office function that acts as a firewall against defaulting traders — is a key rationale for the transaction, and also has been seen as the deal’s biggest hurdle from the announcement. Putting their operations together would potentially make derivatives trading more efficient but also give the companies a worrisome amount of control over prices. While LSE is selling a French clearing unit to Euronext NV, this doesn’t tackle all the issues raised by the EU, the people said.
LSE shares dropped from a daily high of 3,063 pence after the news, and were trading up 1.3 percent to 3,048 pence at 11:45 a.m. in London, while Deutsche Boerse shares fell 85 cents, or 1.1 percent, to 75.31 euros in Frankfurt.
Deutsche Boerse, LSE and the European Commission declined to comment.
The exchange operators haven’t yet formally made a concession offer to the EU and may do so in the coming weeks. The EU also sees problems with the repo market.
Deutsche Boerse and LSE said last month that the EU’s objections were fewer than a long list of potential problems they’d identified earlier. EU regulators blocked Deutsche Boerse’s plan to join forces with NYSE Euronext in 2012, citing concerns the combination would enjoy a near-monopoly in derivatives and could shut out rivals to the clearing market.
A statement of objections lists all the EU’s possible reasons to veto a deal. Companies can overcome these arguments with concessions including asset sales and pledges about how they do business.
Clearinghouses stand between traders and collect collateral to prevent a default from spiraling out of control. Their importance is growing: Regulations since the 2008 financial crisis require clearing of an increasing amount of derivatives trades.
The risks stemming from some derivatives positions, whether they are swaps or futures, offset each other. That’s why keeping them together in one pool is seen as more efficient, which could save bank and asset-manager clients money on collateral. LSE and Deutsche Boerse plan to keep their clearinghouses separate while allowing offsetting trades to cancel out, a process known as portfolio margining.
The commission said the tie-up could reduce competition because it might overwhelm other firms, a theory that the statement of objections labelled “bundle-to-bundle.” LSE controls LCH, the world’s largest clearinghouse for off-exchange interest-rate trades, while Deutsche Boerse owns Eurex Clearing, which dominates futures trading for many types of sovereign debt.
By putting the two units under the same roof, the commission said, the combined LSE-Deutsche Boerse could increase fees because competitors wouldn’t be able to match its offering. CME Group Inc. also clears off-exchange, or over-the-counter, interest-rate trades, while Intercontinental Exchange Inc. runs a clearinghouse for derivatives based on bonds and other instruments.