LONDON, Dec 8 (IFR) - The European Commission is expected on
December 13 to outline its objections to the proposed tie-up
between Deutsche Boerse and the London Stock Exchange Group,
according to people familiar with the matter.
Through an in-depth investigation that began in September,
the Commission is addressing the firms' stranglehold in
derivatives markets. It is a concern that ultimately scuppered
DB's attempted tie-up with NYSE Euronext in 2012 and some fear
that similar issues will put the proposed US$14bn acquisition of
LSEG out of reach.
"The Commission has until March to rule on the deal but the
general feeling is that it may already be dead in the water,"
said one senior broking professional. "The derivatives monopoly
isn't the only problem, but it's the one where it's very
difficult to see a solution."
Research firm Morningstar assigns a 25% likelihood to the
deal going ahead - down from 50% at the March announcement of
the proposed deal as the UK's vote to leave the European Union
piled additional pressure on negotiations.
"As things have progressed, Brexit has had more of an
influence and may have lowered the chance of the deal going
ahead," said Eric Compton, equity analyst at Morningstar.
"Although it might not make much of a fundamental difference to
the deal, Brexit means that the risks have become much more
The proposed tie-up would combine LSEG's dominance in
over-the-counter derivatives clearing through its LCH subsidiary
with DB's Eurex, which has a leading position by volume in
exchange traded derivatives. LCH's SwapClear has US$279trn
outstanding in cleared interest rate swap notional, representing
95% of the cleared swap market.
For regulators, the biggest stumbling block is the
combination of listed and OTC liquidity pools through portfolio
margining, enabling clients to net swaps and futures exposures.
"Swaps and exchange-traded interest rate derivatives
historically had separate ecosystems with liquidity pools that
weren't linked up, but times have changed," said Giles Edwards,
analyst at S&P. "With more portfolio margining between swaps and
rates, a tie-up between the two leaders could in theory be seen
as creating a single dominant provider in clearing. But this
would mean the Commission backtracking on its previous ruling
that the two markets are separate."
Any chance of a regulatory U-turn remains low but it might
not be inconceivable given the threat posed by larger US
exchanges such as CME and InterContinental Exchange, which have
aggressively expanded in listed markets and OTC clearing.
LSEG and DB are much smaller than their US rivals and a
merger may be the only option for a European provider to compete
globally. The combined market capitalisation of the two European
groups stands at US$27bn-equivalent - two-thirds the value of
CME and three-quarters the value of ICE.
Plans by LSEG to hive off Paris-based clearing arm LCH SA may be
little more than a token in addressing competition concerns. The
French platform houses credit default swap clearinghouse
CDSClear, but volumes remain low. Just over 900bn gross
notional of index and single name CDS contracts have been
cleared since its launch in May 2012, compared with over
US$84trn at the InterContinental Exchange since 2009.
"The offer to divest LCH SA doesn't really change a lot,"
said Compton. "The real issue is the combining of the OTC and
listed liquidity pools in interest rate derivatives and that has
never been part of the French subsidiary."
The planned sale may create greater competition
opportunities than the headline figures suggest, however,
offering a European clearing foothold to a rival exchange
operator that may be just enough to appease regulators.
"While a sale of the French clearinghouse wouldn't change
LCH's dominance in swap markets, what it would do is allow
another competitor without a eurozone clearinghouse to have one
immediately," said S&P's Edwards. "That makes it easier for a
competitor to emerge and it could make a lot of sense for
potential buyers, particularly if there are concerns around
location policies following Brexit."
Pan-European stock exchange Euronext was seen as a
frontrunner for LCH's French clearing business while CME has
also been linked with the sale. Many believe the unit offers
value to CME, which already operates clearing businesses in the
US and the UK, and could find itself shut out of the European
Union if Brexit negotiations shut the door on single market
The European Commission declined to comment on timing of
announcements relating to the deal.
(Reporting by Helen Bartholomew; Editing by Ian Edmondson)