Europe blocks Deutsche Börse and London Stock Exchange mergerStaff Writer | March 29, 2017
The European Commission has prohibited the proposed merger between Deutsche Börse AG and London Stock Exchange Group under the EU Merger Regulation.
Merger A de facto monopoly
The proposed merger would have combined the activities of the two largest European stock exchange operators, Deutsche Börse AG (DBAG) and London Stock Exchange Group (LSEG).
They own the stock exchanges of Germany, Italy and the United Kingdom, as well as several of the largest European clearing houses.
Commissioner Margrethe Vestager, in charge of competition policy, said: “The European economy depends on well-functioning financial markets. That is not just important for banks and other financial institutions. The whole economy benefits when businesses can raise money on competitive financial markets.
The merger between Deutsche Börse and the London Stock Exchange would have significantly reduced competition by creating a de facto monopoly in the crucial area of clearing of fixed income instruments. As the parties failed to offer the remedies required to address our competition concerns, the Commission has decided to prohibit the merger.”
The merger would have led to a de facto monopoly in clearing of fixed income instruments (bonds and repurchase agreements) in Europe, where the parties are the only relevant providers of these services.
In particular, the merger would have combined DBAG's Frankfurt based clearing house Eurex with LSEG's clearing houses LCH.Clearnet (which comprises London based LCH.Clearnet Ltd and Paris based LCH.Clearnet SA) and Rome based Cassa di Compensazione e Garanzia.
This monopoly in clearing fixed income instruments would also have had a knock-on effect on the downstream markets for settlement, custody and collateral management. Service providers in these markets depend on transaction feeds from clearing houses.
As DBAG's Clearstream competes with these service providers, the merged entity would have had the ability and the incentive to divert transaction feeds to Clearstream and foreclose the other competitors.
In addition, the merger would have removed horizontal competition for the trading and clearing of single stock equity derivatives (based on stocks of Belgian, Dutch and French companies).
Currently, Eurex competes with a bundled product (combining trading and clearing) offered by Euronext and LCH.Clearnet SA. After the merger, LCH.Clearnet, which has significant pricing power over the bundled product, would have less incentive to compete with Eurex.
Finally, this market power could potentially also be used to squeeze out Euronext.
The Commission raised these concerns in its decision to open an in-depth investigation and communicated them formally to the parties in a Statement of Objections issued in December 2016.
The Commission also raised further preliminary competition concerns on which it eventually did not have to conclude.
It is the responsibility of the parties to address competition concerns either by rebutting them or by proposing adequate remedies.
To be effective, remedies have to address all of the Commission's competition concerns and be viable long-term. ■