Failed DB/NYSE merger could threaten interoperability
The breakdown of
the merger between Deutsche Börse and NYSE Euronext could reinvigorate lobbying
efforts to protect the vertically-integrated exchange model, market observers
Two pieces of
legislation, MiFID II and the European market infrastructure regulation (EMIR),
include open access and interoperability requirements that would force
competition on exchange groups such as Deutsche Börse that run both trading and
clearing businesses. Deutsche Börse offers trading in German and international
stocks on its Xetra electronic trading platform, owns derivatives exchange
Eurex and clears equities and derivatives trades through Eurex Clearing.
merger appeared to be a defensive move to protect both exchanges’ derivatives
businesses from impending competition in the listed and OTC derivatives space,”
suggested Diego Valiante, research fellow at the Centre for European Policy
Studies. “I would now expect the exchanges to apply pressure via the regulatory
process and in particular to the principles of open access and interoperability
and NYSE Euronext received formal notification on 1 February from the European
Commission’s competition authority that their proposed merger would not be
permitted because of the monopoly it would create in listed derivatives. Access to the Eurex trading system for firms looking
to launch interest rate derivatives and access to Eurex Clearing were among the
remedies offered to the Commission by the two exchanges as part of efforts to
push their deal through.
regulation that will accompany MiFID II and leave member states with no room
for interpretation of how they transpose the new rules, includes an obligation for
central counterparties (CCPs) to “accept clearing of and clear financial instruments on a non-discriminatory
and transparent basis”. The rules would apply to equities and listed
While Eurex is arguably
Europe’s strongest listed derivatives market, the collapse of Deutsche Börse’s
merger with NYSE Euronext – combined with MiFIR’s open access requirements – will
likely reduce its revenue opportunities.
“MiFIR is yet another clear
message from European regulators that monopolies in trading and clearing are
unacceptable,” said Niki Beattie, managing director of consultancy Market
Structure Partners. “It is not a good long-term trend for the profitability of
Deutsche Börse but most would hope it spurs them to be innovative and look to
create new products.”
In equities, Deutsche Börse is
one of a group of domestic exchanges that have sat on the sidelines while other
trading venues – including BATS Chi-X Europe, Turquoise, Nasdaq OMX Nordic, UBS
MTF and Nordic MTF Burgundy – have pursued interoperability initiatives ahead
of MiFIR’s introduction. A number of large brokers have already consolidated their clearing flows with one CCP and those venues that offer a choice of
clearers are expected to increase their market share.
Since the introduction of
MiFID in 2007, Deutsche Börse has seen its share of German blue chips fall
steadily. At the start of 2009, its share of DAX stocks was 76.9%, falling to 68%
at the start of 2011 and 63.7% last month, according to data from Thomson
EMIR, which sets a new
regulatory framework for OTC derivatives, includes the same principles of
clearing interoperability as MiFIR as part of its goal to standardise swaps so
they can be traded on exchange and centrally cleared. It will also compel
operators of industry-standard benchmarks to make these available to
competitors on “proportionate fair,
reasonable and non-discriminatory terms”.
After a series of delays
relating to the way CCPs should be supervised, the European Parliament, European Commission and Council
of the European Union are now scheduled to meet on 9 February to finalise the
high-level text. During the debate held by the European Parliament on EMIR last
summer, German MEPs disagreed with UK MEPs over plans to extend the regulation
to listed derivatives.
After EMIR is
agreed, the European Securities and Markets Authority (ESMA) will have until 30 June to write the accompanying technical standards.
Valiante suggested that ESMA could also come under pressure from Deutsche Börse, particularly when
it comes to decide which types of OTC derivatives should fall under the new
rules and the requirements for licencing benchmarks to rivals.
owns index provider STOXX, which owns the hugely popular EURO STOXX 50 and
associated benchmarks. London Stock Exchange-owned multilateral trading
facility Turquoise lodged a complaint with European competition authorities
last year after Deutsche Börse refused the trading venue use of the STOXX indices for its new derivatives platform.
focusing their efforts on regulation, Valiante suggested Deutsche Börse
should look for ways to capitalise on the new regulatory environment.
“After the EMIR
and MiFIR come into force, Deutsche Börse will still have an immediate
competitive advantage compared to their rivals because of the capabilities they
already have, such as a sophisticated trading infrastructure and high economies
of scale that will allow them to manage collateral in a very efficient way,” he
said. “If they push less on the regulatory side and concentrate more on
improving efficiency, they could offset the losses they will incur through
has already begun shaping its offering for the new landscape, most notably
through physical segregation of client collateral in individual accounts,
separate from CCP member firms.
Perrott, exchange analyst at private German bank Berenberg, pointed out that the
success of equity MTFs since MiFID’s initial introduction in 2007, could be
repeated in other asset classes.
“It would be a mistake to
think that there'd be a reliance on incumbent exchanges for the trading
of listed derivatives in light of the fierce competition we have
seen in cash equities post-MiFID I. If anything, the extremely high
liquidity in certain futures contracts would arguably make them easier to
fragment.” he said. “Banks and other market participants would seek to increase
pricing pressure on incumbents by supporting new trading platforms,
and would also hope to benefit from becoming liquidity
aggregators in a fragmented market.”
MiFID II will extend the types
of asset classes covered by the original directive to include listed
derivatives, fixed income and commodities.
One way to deal
with greater competition, according to Beattie, would be cross-continent
“Exchanges need to seriously consider who they want to be working with in the long-term,
particularly as interest in Asian markets and cross-border trading escalates,”
she said. “As well as EMIR, new regulation will constrain banks’
ability to offer funding for OTC products and the need to minimise risk is also
pushing more buy-side firms into listed products, offering more revenue
opportunities for exchanges.”
The most significant capital constraints on banks will come via Basel III, which will
seek to impose a minimum tier one capital ratio of 6% on banks by 2015.