LONDON (Reuters Breakingviews) - The biggest challenge for Deutsche Boerse's merger with the London Stock Exchange might lie not in Brussels but closer to home. Antitrust regulators in the European Union's de-facto capital have limited the scope of their competition probe into the effect on derivatives clearing, and the companies have already offered to sell some businesses in Paris to alleviate concerns. In Deutsche Boerse's home state of Hesse, regulators may be harder to please.
Approval from the state government in Wiesbaden is a must for the deal to progress. The local government has a more fuzzy mandate than antitrust authorities in Brussels: to ensure the "adequate further development" of the local exchange is not impaired.
Some German policymakers argue that locating the holding company's headquarters in London would do precisely that. Once the United Kingdom leaves the EU, the area's most important exchange would be controlled by a company outside of European jurisdiction. Michael Boddenberg, parliamentary leader of Hesse's ruling Christian Democrats, on Dec. 7 deemed such a setup "plainly impossible". Felix Hufeld, head of Germany's financial market regulator BaFin, is also sceptical.
There is historical baggage too. Hesse is still mourning the disappearance of Frankfurt-based Hoechst AG, once one of Germany's largest chemical companies but since 2004 part of French drug maker Sanofi. This partly explains why the government of Hesse in 2015 staunchly backed fertiliser-maker K+S in its successful defence against Canadian rival Potash Corp.. Long-reaching job guarantees for Deutsche Boerse's staff in Frankfurt, as well as binding investment commitments, may not be enough to overcome these concerns.
German lawmakers may only approve the deal on the condition that the holding company will be incorporated in Frankfurt. Yet changing the terms of the merger already agreed by both companies' investors may require another shareholder vote, which would be time-consuming and could unravel the carefully-designed balance of power. For now, London gets the holding company and the German side gets to supply the chief executive, Carsten Kengeter. If one side of that grand bargain comes unstuck, so may the whole thing.