NYX Nyse Euronext

The U.S. Justice Department blessed the merger of NYSE Euronext (NYX) and Deutsche Boerse AG (DBOEF, DB1.XE) Thursday, even as the mega-exchange deal faced mounting hurdles in its European antitrust review.

To win U.S. approval, the exchange operators agreed to a proposed settlement with the Justice Department that would sell the enlarged entity's 31.5% stake in Direct Edge Holdings LLC, an electronic-exchange company that competes with the Big Board for U.S. stock-trading business.

U.S. competition authorities said in a statement that the transaction as originally proposed "would have substantially lessened competition" for securities trading and related businesses like listings and pricing data. The DOJ filed the proposed settlement Thursday in a Washington federal court, where it must be approved by a judge.

A green light from the Department of Justice was generally expected, as the two main businesses where NYSE Euronext and Deutsche Boerse overlap in the U.S.--stock and options trading--are intensely competitive due to the structure of market regulations.

Tougher questions are being posed in the European Union, where antitrust regulators have zeroed in on the companies' dominance of regional futures and options trading. A merged Deutsche Boerse and NYSE Euronext would control an estimated 90% of on-exchange derivatives trading in Europe, prompting EU officials to press for divestitures and concessions.

Doubts now hang over the $18 billion combination, which would create the world's largest combined platform for share listings and derivatives trading. A Wednesday meeting between the exchanges and EU regulators failed to smooth fears that the combined entity would be overly dominant in futures, despite a pledge in recent days by the exchanges not to raise trading fees for a three-year period.

Spokespeople for the EU Commission weren't immediately available to comment.

No further meetings between the exchanges and the EU team probing the deal are currently scheduled, according to a person close to the discussions. People familiar with the matter said EU competition commissioner Joaquin Almunia intends to give a preliminary decision on the deal in January in a report that will be the basis for the crucial discussions of all 27 EU commissioners. They will make the final decision by Feb. 9.

The Justice Department said in its statement Thursday that officials communicated extensively with counterparts in Europe as they considered the matter.

NYSE Euronext and Deutsche Boerse issued statements Thursday describing the Justice Department move as an important milestone.

The settlement requires that the merged company divest the ownership stake in Direct Edge, the fourth-largest exchange operator in the U.S., within two years. Deutsche Boerse has maintained the 31.5% position since late 2008, held through the International Securities Exchange, a wholly-owned subsidiary of Deutsche Boerse that is focused on options trading.

ISE and Direct Edge had no immediate comment on the announcement.

NYSE Euronext and Deutsche Boerse already had considered diluting their stake in Direct Edge if the merger goes through, a move that could prompt other firms to join the consortium-ownership group that also includes Knight Capital Group (KCG), hedge-fund operator Citadel and Goldman Sachs Group (GS).

The parents' exit also could provide an entry point for Direct Edge to float shares in an initial public offering, a step the company has considered in the past.

As part of the agreement with the Justice Department, ISE executives sitting on the Direct Edge board will shift to a passive role. ISE Chief Executive Gary Katz, Chief Strategy Officer Thomas Ascher and General Counsel Michael Simon serve on the board.

If the merger goes through, those directors will be required to resign within two days of the deal closing, according to the settlement with the Justice Department.

-By Brent Kendall, Dow Jones Newswires; 202-862-9222; brent.kendall@dowjones.com

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