The European Commission, the executive arm of the EU, has three
major objections against the planned tie-up of Deutsche Boerse AG
(DB1.XE) and NYSE Euronext (NYX), according to information Dow
Jones Newswires obtained from several people familiar with the
matter Thursday.
Sticking points center on the handling of derivatives--which the
combined group would dominate in Europe--and the licensing of stock
indexes, areas long anticipated to be scrutinized in the antitrust
process.
"This was not a surprise to us, this was an expected part of the
process and what this does is it narrows the funnel so we now know
what the case team in Brussels, who's been dedicated to the merger
proposal, thinks about the deal," Duncan Niederauer, chief
executive of NYSE Euronext and slated CEO of the merged entity,
said in a video message to his staff last week.
Deutsche Boerse and NYSE Euronext agreed to their $17.7 billion
merger in February and won the backing of shareholders in July.
Last week NYSE and Deutsche Boerse received a formal statement of
objections by the EU on the trading powerhouses' planned
tie-up.
The merger partners are likely to request an open hearing be
held later this month as part of its response to the statement,
Niederauer told his employees in the message, a transcript of which
was filed with U.S. regulators this week.
Approval by the EU antitrust authorities, which opened an
in-depth probe in early August, is the biggest hurdle still facing
the deal. Findings in the statement of objections are provisional
and remain up for discussion.
Shares in NYSE Euronext recently were down 2.6% at $26.98 amid a
sell-off in U.S. stocks. Deutsche Boerse shares were off 0.9% at
EUR41.78.
The EU's chief objections center on derivatives trading, where
Deutsche Boerse and NYSE Euronext already run the region's two
biggest futures and options markets.
Competition authorities want the exchanges' combined derivatives
clearing operations to be opened up to third parties, three people
familiar with the matter told Dow Jones Newswires.
Such a scenario would likely allow trades carried out on
competing derivatives exchanges to be routed to Deutsche
Boerse-NYSE's clearinghouse, with collateral for these trades held
alongside business done on the merged company's own markets, the
people familiar with the details said.
The move might make it easier for new entrants to European
futures and options trading to compete against the enlarged group
because their customers' expenses could come down. Electronic
trading platforms like Turquoise, owned by the London Stock
Exchange Group PLC (LSE.LN), and Chi-X Europe are moving into the
derivatives business.
But this sort of more-open access is unlikely to be a "game
changer" in Europe, said Jillian Miller, analyst with BMO Capital
Markets. As long as rival exchanges' contracts are not fully
interchangeable with those traded on NYSE and Deutsche Boerse's
markets, the incumbents' existing critical mass will win out.
"If this is the case, I'd be very surprised if it meaningfully
changed the dynamics in Europe," said Miller, who said she has not
reviewed the EU statement.
In addition, when assessing the merged companies' dominant
market position in the derivatives market, the EU will base the
assessment on listed derivatives only, three people close to the
matter said. This makes it more difficult for the merger candidates
to prove that they don't have a market-dominant position in the EU
and could require other concessions.
In the listed derivatives market in the EU, the two entities
combined have a market share of above 90%; when including
derivatives traded over the counter, that figure drops to around
16%.
A third point of criticism is that the EU wants the two parties
to agree to a more liberal selling of index licenses to third
parties, said one person familiar with the matter. Both Deutsche
Boerse and NYSE Euronext have ownership in some of Europe's most
widely followed stock benchmarks, such as France's CAC 40,
Germany's DAX and the Stoxx Ltd. index family.
Such indexes underly heavily traded futures and options
contracts, and exchanges closely guard exclusive rights to the
indexes for these purposes. The London Stock Exchange Group has
sought to license the Deutsche Boerse-owned EuroStoxx 50 index, and
protested when its request was refused.
Both exchange operators have now time to come up with remedies,
and will send their proposed remedies to the EU on Nov. 8 at the
earliest, said two people familiar with the matter.
The two exchange operators will send a redacted copy of the EU's
statement of objections back to the EU in the next few days, either
Friday or Monday, two people familiar with the matter said. The EU
will then circulate the redacted copy of the statement of
objections among competitors and exchange customers who
participated in a recent market survey.
NYSE's Niederauer told employees in his video recording that the
firms are making "good progress" on integration efforts that
currently are ranging ahead of the pace set during NYSE's merger
with Euronext in 2007.
"Senior management from both companies are talking on an almost
daily basis, and I will promise you we can resolve any issues that
we're having and we're very close to making some key decisions and
I think the spirit at the senior level continues to be quite good;
we just need to make sure that spirit cascades down at both
companies," Niederauer said.
-By Ulrike Dauer, Dow Jones Newswires; +49 69 29725 500;
ulrike.dauer@dowjones.com
--Jacob Bunge and Doug Cameron in Chicago contributed to this
article.
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