The proposed merger of Deutsche Börse and NYSE Euronext has been blocked by European competition authorities because of the monopoly it would create in the region’s exchange-traded derivatives market.
The two firms are now terminating their agreement and both have stated they will now pursue their own individual organic growth strategies.
The deal brings to an end months of ultimately fruitless lobbying by both bourses as they endeavoured to convince the European Commission’s competition unit that the combination of Deutsche Börse’s Eurex and NYSE Liffe would create a European derivatives powerhouse able to compete with the US-based CME Group. If they were to have combined, Eurex and NYSE Liffe would have had upwards of 90% in many European exchange-traded derivatives.
“This is a black day for Europe and for its future competitiveness on global financial markets,” read a statement from Deutsche Börse’s executive board. “The EU Commission’s decision is based on an unrealistically narrow definition of the market that does no justice to the global nature of competition in the market for derivatives. In its decision, the European Commission takes a contrary stand to the assessment of the derivatives market arrived at in the USA back in 2007. There, the two Chicago exchanges – CME and CBOT – were allowed to merge to form the largest globally operating derivatives exchange."
The two exchanges had submitted a number of concessions to European authorities as part of efforts to get the deal approved.
This included the divesture of certain parts of Deutsche Börse’s and NYSE Euronext’s respective equity options businesses, access to the Eurex trading system for firms looking to launch interest rate derivatives and access to Eurex Clearing.
Speaking at a press conference shortly after the decision was announced, Deutsche Börse CEO Reto Francioni said the remedies were offered despite the fact that the exchanges disagreed with the Commission’s “narrow” view of the merger’s impact on competition.
Francioni added that the impending regulatory change to the “massive OTC derivatives market, which the Commission is also pursuing, was completely precluded from the decision”.
Under the European market infrastructure regulation, which is close to completion despite facing a number of delays over the last few months, many OTC derivatives will be standardised so they can be traded on exchange and centrally cleared, opening up new business opportunities for exchanges. As of June 2011, there was US$707 trillion worth of exposure outstanding in the OTC market, according to the Bank for International Settlements.
Francioni stressed during the press conference that Deutsche Börse was in a strong position to pursue growth in the OTC derivatives market, given its ownership of international central securities depository Clearstream and Eurex.
Deutsche Börse is hoping to finalise the purchase of SIX Swiss Exchange’s 15% stake in Eurex this year, which Francioni said would deliver €100 million worth of new revenue.
NYSE Euronext said that following the termination of the deal, it would now resume a US$550 million share repurchase program.
“While we viewed the merger as a way to accelerate our plans, our existing business model was always central to our strategy,” said NYSE Euronext CEO Duncan Niederauer. “Our business had a strong year, giving us the opportunity to return more capital to our shareholders, as evidenced by today’s buy-back announcement.”
He added that the exchange would also look to take advantage of new opportunities in derivatives and continue to build its technology business.
The DB/NYSE deal was first proposed in February last year, with the promise of creating an exchange with a market capitalisation of €9 billion and delivering cost savings to customers of around US$800 million.