The European Commission (EC) has conducted a second round of market feedback about the proposed merger of NYSE Euronext and Deutsche Börse, confirming that the potential creation of a listed derivatives monopoly in Europe is a major concern for regulators and market participants.
The EC's competition department called for responses by 1 September to a second questionnaire relating to the DB/NYSE deal that focuses exclusively on derivatives, and in particular the way that market participants manage their listed versus over-the-counter (OTC) derivatives trading activity.
The questionnaire asks for the reasons why a firm may choose to trade derivatives on an OTC basis, rather than on an exchange, and the risks and costs associated with exchange-traded and OTC swaps. It also questions how market participants make use of NYSE Euronext's B-Clear Deutsche Börse's OTC Flex, which both offer clearing services for OTC derivatives, and how they would react if the cost of trading listed derivatives were to rise by 5-10%.
The questionnaire attempts to ascertain the degree of choice available to market participants when executing derivatives transactions in Europe's listed and OTC derivatives markets, both now and following the introduction of legislation to establish new trading venues. An initial draft of MiFID II, due to be published next month by the EC, is expected to include details of new trading platforms, currently referred to as organised trading facilities, onto which standardised OTC derivatives will migrate by end-2012. In the new questionnaire, the EC asks, “Please explain to what extent standardised OTC contracts could be executed on an exchange or electronic trading platform in the same manner as OTC. In other words, are these contracts directly substitutable to some exchange traded derivatives?”
The first questionnaire issued by the EC on 7 July drew a number of responses from exchanges and brokers that raised objections to the DB/NYSE merger on grounds of the long-term monopoly it could establish in listed derivatives. Combined, NYSE Liffe and Eurex, the derivatives businesses operated by NYSE Euronext and Deutsche Börse respectively, have a 98% market share in some European exchange-traded derivatives.
“The correlation of Eurex Clearing fixed income products with NYSE Liffe Clear fixed income products, correlation of the combined entities' equity indices products and correlation of the combined entities' single stock derivatives would provide possibilities that no other CCP would be able to offer,” read the response to the first questionnaire from Nasdaq OMX, which failed in its counterbid for NYSE Euronext in May because of concerns raised by the Antitrust Division of the US Department of Justice.
“New entrants have been unable to challenge their position because of restrictive licensing practices and closed clearing pools,” read the submission from London Stock Exchange (LSE).
The prospective partners have defended the impact of the merger on Europe's derivatives market in terms of global competition and scale benefits to users.
“One of the primary objectives of the deal was to combine the two derivatives offerings,” Roland Bellegarde, executive vice president for European listings and cash trading, NYSE Euronext, told theTRADEnews.com recently. “Such a combination would bring together two complementary derivatives businesses and would give them the scale and depth to compete effectively in a global industry with many other powerful market participants.”
Turquoise, the MTF owned by the LSE, was recently refused a licence to offer derivatives products based on STOXX products, the index provider joint-owned by Deutsche Börse and SIX Swiss Exchange. Turquoise is currently discussing its case with European competition authorities.
Much of the ability of a combined DB/NYSE to dominate European listed derivatives will depend in part on the final wording of the European market infrastructure regulation, which is likely to be the subject of protracted negotiations between the European Parliament and the Council of the European Union, once the latter body has established a united position.
The final text could include a clause that may allow trading venues to licence derivatives from existing markets more easily, and could force vertically-siloed exchanges to open up their clearing houses to competitors in listed derivatives to support interoperability.
Deutsche Börse initiated talks to merge with NYSE Euronext in February 2011, in a deal that would create an entity with a market capitalisation of US$9 billion. The EC is now in the second phase of its scrutiny of the deal and is expected to report back on its findings on 13 December 2011.