NYX Nyse Euronext

The European Commission on Wednesday blocked the merger of Deutsche Boerse AG (DB1.XE) and NYSE Euronext (NYX), saying the deal would create a "quasi-monopoly" in derivatives trading.

The move, widely expected for weeks, officially ends the two firms' vision of creating a global exchange operator, after months of negotiating with antitrust officials at the commission, the European Union's executive arm. The commission rejected the companies' arguments that the deal would lower trading costs more than it would harm competition. It also rejected their proposed solution to the commission's concerns about the merger's impact on competition in derivatives trading.

"These markets are at the heart of the financial system, and it is crucial for the whole European economy that they remain competitive," said Joaquin Almunia, the commission's top merger regulator, after a meeting with the 26 other commissioners in the EU executive body. "We tried to find a solution, but the remedies offered fell far short of resolving the concerns."

The companies may yet appeal the ruling in court, though NYSE Euronext Chief Executive Duncan Niederauer said executives would take some time to evaluate the ruling before deciding to pursue the matter further. Such an effort could be expensive and take years, and success isn't assured.

"Before we go there we would like for all of us to have some time to digest the decision in full detail, where it's rooted and what we think," Niederauer said in an interview. "But it's something we both would consider."

A few commissioners--Michel Barnier and Guenther Oettinger, the French and German commissioners--raised concerns about blocking the merger, an official said. But most, including senior figures such as Justice Commissioner Viviane Reding and Jose Manuel Barroso, the commission president, strongly supported Almunia, according to the official.

The commission's objections centered around Eurex and Liffe, the European exchanges operated by Deutsche Boerse and NYSE Euronext, respectively. Combining the two units would give the company a more than 90% market share in exchange-traded derivatives.

Moreover, both exchanges have their own clearing houses, entities that stand between buyers, absorbing losses if either side defaults. The commission worried that combining the two firms would have created a dominant EU clearing house that could offer powerful incentives for traders to stick with incumbent exchanges rather than switch to competitors.

The exchanges argued that creating a giant, European trading venue--complete with its own clearing house--would mean lower trading costs. But the commission said the new firm's monopoly power would have allowed it to retain those benefits as profits, rather than pass them on to customers as lower costs.

"Any efficiencies would not be substantial enough to outweigh the harm to customers caused by the merger," the commission said.

Derivatives trading, more profitable than stock dealing, had been the keystone of the $17.9 billion combination since it was unveiled in February 2011. The companies argued that their European derivatives trading businesses focus on different segments of the market: short-term interest-rate futures for Liffe and long-term futures for Deutsche Boerse. They also noted that the over-the-counter market, still home to the vast majority of derivatives trading globally, offers plenty of competition to trading done through exchanges.

But the commission took a different view of the market: "The investigation showed that [exchange-trade derivatives] and OTCs are generally not considered as substitutes by customers, since they use them for different purposes and in different circumstance," it said.

Serious threats to the deal emerged in December, when EU competition regulators proved unsatisfied with several deal concessions put forward by Deutsche Boerse and NYSE Euronext. Proposed remedies included allowing rivals limited access to the combined company's trade-clearing operations, as well as the spinoff of some contracts traded on both companies' markets.

Neither exchange company was willing to divest its derivatives franchise to make the deal happen. Executives of both firms said such a step would undermine the logic of the merger plan.

NYSE Euronext and Deutsche Boerse pushed for their deal up until the end, with officials from both companies lobbying European Commissioners at last week's World Economic Forum in Davos to approve the deal in spite of the antitrust regulators' conclusion.

Deutsche Boerse said Wednesday that it is in a position for growth even without a merger, following earnings and revenue growth in 2011. NYSE Euronext immediately announced plans to resume a $550 million share buyback program after release of its fourth-quarter results Feb. 10.

-By Matthew Dalton, Dow Jones Newswires; +32 (0)2 741 1487; matthew.dalton@dowjones.com

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