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Commission opens in-depth investigation into proposed Deutsche Börse/LSE merger
The European Commission has opened an in-depth investigation to assess, under the EU Merger Regulation, whether the proposed merger between Deutsche Börse AG (DB) and London Stock Exchange Group (LSE) would reduce competition in several financial market infrastructure areas.
The proposed merger would combine the activities of DB and LSE. By combining the exchanges of Germany, the United Kingdom and Italy, as well as several of the largest European clearing houses, it would create by far the largest European exchange operator.
Commissioner Margrethe Vestager, in charge of competition policy, said: “Financial markets provide an essential function for the European economy. We must ensure that market participants continue to have access to financial market infrastructure on competitive terms. Therefore, we have opened an in-depth investigation to assess the proposed merger.”
The Commission's preliminary concerns
The Commission's initial market investigation identified preliminary concerns in the following markets:
The transaction would combine several of the largest central counterparties (CCPs) in Europe. CCPs are responsible for "clearing" transactions: they sit in between the counterparties of a trade, assuming the risk of default of each counterparty vis-à-vis the other. In order to guard against this risk, market participants have to provide collateral to CCPs. This is commonly referred to as "margin". The merged entity would combine the largest margin pool in the world, reaching €150bn.
The Commission has preliminary concerns that the combination of the parties’ clearing houses could:
- eliminate competition in a number of areas, including bonds, derivatives and repurchasing agreements (repos),
- adversely affect competing trading venues that depend on clearing services provided by LSE's clearing house (LCH.Clearnet),
- adversely affect competitors in post-trade markets, such as collateral management, settlement and custody services.
Derivatives are financial instruments that derive their value from the development of underlying assets. DB's Eurex is the global market leader for exchange traded long-term interest rate derivatives, while LSE's SwapClear is by far the largest player for the clearing of interest rate derivatives traded off-exchanges, through so-called over-the-counter transactions ("OTC"). Both parties have recently set up, or are in the process of launching, competing offerings to each other’s franchises. The Commission has preliminary concerns that their development might be put at risk by the proposed transaction.
In addition, the Commission has preliminary concerns that the proposed transaction could lead to a near-monopoly in single stock equity futures and options based on Italian underlying instruments (securities) where parties are de facto the only competitors.
(c) Repurchasing agreements ("repos")
Repurchasing agreements are important instruments for short-term refinancing of market participants. These instruments have grown in importance since the financial crisis, as they are a secure way of obtaining financing at short notice. The parties are close competitors for a certain type of repo (triparty) and also currently the only players offering clearing services for this type of instrument. The Commission has preliminary concerns that competition in repo markets could be reduced.
(d) German stocks
The parties would combine two of the three largest venues that currently offer trading of German listed equities. The Commission has preliminary concerns that the proposed transaction could therefore lead to a significant loss of competition for these types of products.
(e) Exchange Traded Products ("ETP")
The proposed transaction would also combine two very large players in the areas of listing, trading and clearing of exchange traded products, which include exchange traded funds ("ETFs"). These are used as passive investment vehicles and have become an increasingly popular means of investment. The Commission has preliminary concerns that competition on ETP markets could be reduced.
(f) Other markets
The Commission will also use the in-depth investigation to further analyse the impact of the transaction on competition in other markets such as (i) international listing of non-EEA companies; (ii) dealer-to-dealer electronic trading of German Government bonds, where both parties are the largest players; (iii) index licensing, where the parties combine the largest European index families, namely DAX, STOXX and FTSE Russell; (iv) trading and clearing of freight derivatives; (v) settlement and custody services; (vi) IT services; and (vii) regulatory and trade reporting.
The transaction was notified to the Commission on 24 August 2016. The Commission now has 90 working days, until 13 February 2017, to take a decision. The opening of an in-depth inquiry does not prejudge the final result of the investigation.
Companies and products
Deutsche Börse AG is a diversified financial market infrastructure organisation, best known for operating the Frankfurt Stock Exchange, a regulated marketplace for trading stocks, bonds and various other financial instruments. It also operates other regulated exchanges, most notably the Eurex and EEX exchanges, trading various types of derivative products. Apart from trading, its activities include the supply of post-trade infrastructure services such as clearing, settlement and custody services, as well as market data, indices and other information products.
London Stock Exchange Group is one of Europe's pre-eminent financial infrastructure companies, best known for operating the London Stock Exchange. It also owns Borsa Italiana, the Italian stock exchange, and operates a number of other trading platforms for trading of stocks, other equity-like exchange traded products, bonds and derivatives. LSE is also active in the post-trading space, most notably in clearing through the London Clearing House ("LCH") including SwapClear, and Cassa di Compensazione e Garanzia ("CC&G"), the Italian clearinghouse. LSE also offers settlement and custody services as well as indices, data, and other information products.
Merger control rules and procedures
The Commission has the duty to assess mergers and acquisitions involving companies with a turnover above certain thresholds (see Article 1 of the Merger Regulation) and to prevent concentrations that would significantly impede effective competition in the EEA or any substantial part of it.
The vast majority of notified mergers do not pose competition problems and are cleared after a routine review. From the moment a transaction is notified, the Commission generally has 25 working days to decide whether to grant approval (Phase I) or to start an in-depth investigation (Phase II).
In addition to the current transaction, there are three other on-going phase II merger investigations:
- the proposed takeover of railway equipment manufacturer Faiveley by Wabtec, with a decision deadline on 24 October 2016;
- the proposed merger of Dow and DuPont, both of the US; and
- the proposed acquisition of the Greek gas transmission system operator DESFA by the Azeri state oil company SOCAR.
More information will be available on the competition website, in the Commission's public case register under the case number M.7995.
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