DB/NYSE merger remedies deemed insufficient by peers

US-based exchange group Nasdaq OMX has led calls for new concessions following measures proposed to regulators earlier this month by Deutsche Börse and NYSE Euronext to win approval for their planned merger.
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US-based exchange group Nasdaq OMX has led calls for new concessions following measures proposed to regulators earlier this month by Deutsche Börse and NYSE Euronext to win approval for their planned merger.

“In our view the proposed remedies do not address the competition concerns raised by the European Commission’s competition division in the statement of objections,” said Hans-Ole Jochumsen, president of Nasdaq OMX Nordic. “The remedies are far from sufficient. They also raise complex issues of practicability, reliability, compliance, monitoring etc, that will make them ineffective.”

Despite the negative market feedback, a spokesperson for Deutsche Börse said that the two exchange operators have no intention of updating their proposal.

The comments follow the circulation of a questionnaire by the European Commission’s competition division, asking market participants for their views on the solutions presented by DB/NYSE to allay fears of monopolistic behaviour in the listed derivatives market in the event of the groups’ proposed merger. Deutsche Börse operates the Eurex derivatives trading business while NYSE Euronext runs Liffe, the London-based derivatives market it purchased in 2001.

“The proposed merger, if implemented in its current form [i.e. prior to any remedies], would significantly impede effective competition in the internal market,” read the questionnaire. The Commission requested responses by 29 November.

As it stands, a DB/NYSE combination would have a market share of over 90% in European equity derivatives, listed equity options and fixed income derivatives.

The concessions announced by DB/NYSE on 18 November are centred on fair and open access to Eurex Clearing for interest rate and equity derivatives, including the provision of cross-margining services.

The two exchange operators also committed to divesting the portions of their business in which they overlap, specifically NYSE Euronext’s Bclear clearing and trading service for single equity derivatives, excluding the options business in its home markets. Deutsche Börse would sell off its respective units in France, the Netherlands, Belgium and Portugal.

“Deutsche Börse and NYSE Euronext continue to believe that the transaction will have no detrimental effect on competition, but rather will enhance it by delivering a regulated, stable and transparent European counterweight to established market centres in America and Asia and delivering significant efficiencies to users of our markets,” the two bourses said in the 18 November statement.

Access limited

However, the questionnaire reveals details of the Eurex Clearing access arrangements that were not mentioned in the public statement of concessions and appear to limit their impact. For example, third-party equity index derivatives must be less than 85% correlated with existing products on Eurex, such as STOXX,the index suppler joint-owned by Deutsche Börse and SIX Swiss Exchange. This is highly likely to prevent Chi-X Europe, the multilateral trading facility (MTF) that is planning a derivatives foray with Russell Investments by creating its own pan-European indices, from using Eurex Clearing services.

In its current wording, third-party access will only be afforded to “regulated markets”, a further impediment to Chi-X Europe, as well as Turquoise, the London Stock Exchange-owned MTF that launched its derivatives platform in June 2011.

Furthermore, open access arrangements will only last for three years after the completion of the deal, although the EC will have the option to extend this for a further two years.

This point is particularly significant as it means initial open access arrangements may have expired before the introduction of MiFID II. It is currently anticipated that the second version of MiFID will have passed all of its legislative stages at some point in 2014.

“We believe the development towards increased competition after MiFID, will be reversed by the merger,” added Jochumsen at Nasdaq OMX Nordic. “It will create a dominant player that will reduce competition and increase systemic risk.”

The restrictions on access to Eurex clearing have been decried by a number of market participants, with one director at a London-based brokerage describing the remedies as “farcical”.

“Given that DB/NYSE are among the largest exchange groups, I would have expected them to offer stronger concessions the get their deal approved because of the overall benefits the merger would have on their ability to compete on a global scale,” added Diego Valiante, research fellow at the Centre for European Policy Studies.

Valiante believes that as well as more generous terms for open access to Eurex Clearing, the two exchange groups should have taken other remedies further.

“The opening up of the vertical silo that would be created by the DB/NYSE merger needs to encompass all parts of the business,” says Valiante. “This includes settlement, where Deutsche Börse has a very significant offering through its Clearstream subsidiary, as well as access to benchmark indices such as STOXX.”

Turquoise Derivatives has already been prevented by STOXX from using the firm’s European indices

as the basis for new derivatives instruments.

Valiante suggests that the merged entity should be made to divest the entire equity derivatives trading business of NYSE Liffe, as the dominant force created by the combination of STOXX with FTSE, the index provider used by NYSE Liffe for its benchmark derivatives products, would act as a major barrier for competitors.

The Deutsche Börse spokesperson added that divesture of NYSE Liffe was “not an option” under consideration.

The two exchange groups now face an anxious two months as they await the final decision from the EC, which is expected on 23 January.