EU Blocks Deutsche Börse-NYSE Euronext Merger

by Ulrika Lomas, LawAndTax-News.com, Brussels

06 February 2012

The European Commission (EC) has prohibited, on the basis of the European Union (EU) Merger Regulation, the proposed merger between Deutsche Börse and NYSE Euronext, as it would have resulted in a quasi-monopoly in the area of European financial derivatives traded globally on exchanges.

The merger was notified to the EC in June last year. Subsequently, at the beginning of August, the EC decided to launch an in-depth investigation, and the two exchanges were advised in a Statement of Objections sent in October 2011 that the merger as notified raised serious concerns and, in the absence of a sufficient remedy, might be prohibited.

It has been pointed out that, put together, the two parties control more than 90% of global trade in financial derivatives traded on exchanges. Eurex, operated by Deutsche Börse, and Liffe, operated by NYSE Euronext, are the two largest exchanges in the world for financial derivatives based on European underlyings.

They compete head-to-head and are each other's closest competitors. The proposed merger would have eliminated this global competition and created a quasi-monopoly in a number of asset classes, leading, it was said, to “significant harm to derivatives users and the European economy as a whole”.

Although other companies, including the Chicago Mercantile Exchange (CME), provide similar services worldwide, they only do so marginally in the asset classes concerned. The investigation showed that due to the high barriers to entry, no other player would be able to develop trading in European financial derivatives on a sufficient scale to keep the market competitive.

The two companies claimed that the merger would benefit customers through greater liquidity. However, the EC felt it unlikely that the merger would directly yield such benefits. Above all, with no effective competitive constraint left in the market, the benefits of price competition would be taken away from customers. There would also be less innovation in an area where a competitive market is vital for all European businesses.

While the companies offered to sell certain assets and to provide access to their clearinghouse for some categories of new contracts, it was considered that the commitments were inadequate to solve the identified competition concerns.

The EC, therefore, felt that it had no alternative but to conclude that the concentration "would significantly impede effective competition in the internal market or a substantial part of it" (Art 2.3 of the Merger Regulation), and prohibited the transaction.

EC Vice President in charge of competition policy, Joaquín Almunia, said: "The merger between Deutsche Börse and NYSE Euronext would have led to a near-monopoly in European financial derivatives worldwide. These markets are at the heart of the financial system and it is crucial for the whole European economy that they remain competitive. We tried to find a solution, but the remedies offered fell far short of resolving the concerns."

In response to the Commission's decision, NYSE Euronext has disclosed that the two companies are in discussions to terminate their merger agreement.

NYSE Euronext said it would now focus on its "successful standalone strategy that has delivered strong growth and diversification of its core businesses". In that regard, NYSE Euronext announced its intent to resume a USD550m share repurchase program following the termination of the merger agreement.

“While we are disappointed and strongly disagree with the EU decision, which is based on a fundamentally different understanding of the derivatives market, it is now time to move on and return our sole focus to executing our compelling existing strategy – a strategy we have continued to implement without missing a beat over the last year," stated Jan-Michiel Hessels, NYSE Euronext Chairman.

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