<p><em>(BRUSSELS) </em>- Brussels blocked a proposed merger between Deutsche Boerse and the London Stock Exchange Wednesday, saying it would create a de facto monopoly in the markets for clearing fixed income instruments.</p> <p>The proposed merger would
(BRUSSELS) – Brussels blocked a proposed merger between Deutsche Boerse and the London Stock Exchange Wednesday, saying it would create a de facto monopoly in the markets for clearing fixed income instruments.
The proposed merger would have brought together the two largest European stock exchange operators, owning the stock exchanges of Germany, Italy and the United Kingdom, as well as several of the largest European clearing houses.
“The merger between Deutsche Boerse and the London Stock Exchange would have significantly reduced competition by creating a de facto monopoly in the crucial area of clearing of fixed income instruments,” said the EU’s Competition Commissioner Margrethe Vestage: “As the parties failed to offer the remedies required to address our competition concerns, the Commission has decided to prohibit the merger.”
The merger would have led to a de facto monopoly in clearing of fixed income instruments (bonds and repurchase agreements) in Europe, where the parties are the only relevant providers of these services. In particular, the merger would have combined DBAG’s Frankfurt based clearing house Eurex with LSEG’s clearing houses LCH.Clearnet (which comprises London based LCH.Clearnet Ltd and Paris based LCH.Clearnet SA) and Rome based Cassa di Compensazione e Garanzia.
This monopoly in clearing fixed income instruments would also have had a knock-on effect on the downstream markets for settlement, custody and collateral management. Service providers in these markets depend on transaction feeds from clearing houses, says the EU executive. As DBAG’s Clearstream competes with these service providers, the merged entity would have had the ability and the incentive to divert transaction feeds to Clearstream and foreclose the other competitors.
In addition, the merger would have removed horizontal competition for the trading and clearing of single stock equity derivatives (based on stocks of Belgian, Dutch and French companies). Currently, Eurex competes with a bundled product (combining trading and clearing) offered by Euronext and LCH.Clearnet SA. After the merger, LCH.Clearnet, which has significant pricing power over the bundled product, would have less incentive to compete with Eurex. Finally, this market power could potentially also be used to squeeze out Euronext.
The Commission raised these concerns in its decision to open an in-depth investigation and communicated them formally to the parties in a Statement of Objections issued in December 2016. The Commission also raised further preliminary competition concerns on which it says it eventually did not have to conclude.
The parties had proposed a remedy consisting of the divestment of LCH.Clearnet SA, LSEG’s France-based clearing house to address the Commission’s concerns.
While Brussels concluded that this divestment would have resolved the concerns relating to single stock equity derivatives, it says it would not have been effective to remedy the concerns stemming from the creation of the de facto monopoly in fixed income clearing.
This, it says, is what emerged from the market test of the remedy. Market testing is the phase of a merger investigation during which the Commission consults on proposed remedies with market participants to allow them to submit their views.
More information will be available on the Commission’s competition website, in the public case register under the case number M.7995.
