LONDON If the merger between London Stock Exchange (LSE.L) and Deutsche Boerse (DB1Gn.DE) goes ahead, it could be the final mega-deal in the industry as further combinations of such scale are likely to hit antitrust buffers.
The two companies will seek to overcome the kind of regulatory concerns that scuppered Deutsche Boerse's attempt to merge with NYSE Euronext four years ago, a deal blocked because it would have created a near-monopoly on exchange-traded derivatives in Europe.
They could argue there is less overlap between certain business lines in any one region, namely Europe, say industry experts; for example while Deutsche Boerse has a big European derivatives trading operation, LSE is largely absent from that business.
If the deal is cleared it would create a "Big Four" of trading powerhouses that outstrip rivals in terms of market value and global reach - ICE (ICE.N) and CME (CME.O) in the United States, LSE-DB in Europe and Asia's Hong Kong Exchanges and Clearing (0388.HK).
Each would have such large global operations in shares and derivatives trading, as well as indices and clearing, that any argument that business lines do not overlap could not prevail again, say industry officials and analysts.
"The very big players are already starting to be in danger of running into antitrust anywhere they go," said Patrick Young, a consultant to exchanges since the days of the first LSE-Deutsche Boerse tie up proposal back in 2000.
"We are coming to the point where the great exchanges merger game is coming to an end, the great powers have been defined."
Regulators would be unlikely to allow the CME and ICE to merge, for instance, given a combined group would have a near-unassailable position in U.S. securities trading.
It is also unlikely that ICE would be allowed to buy a combined LSE-Deutsche Boerse group as this would create an effective monopoly of listed derivatives trading in Europe, say analysts.
It would also be hard to envisage the Chinese government allowing a foreign exchange take over Hong Kong Exchanges & Clearing, they said.
If the LSE deal goes ahead, any big exchange looking to expand might instead have to look to hoovering up smaller peers.
"There is no one else left to buy up. It would be a range of mega exchanges buying a couple of selective, medium-sized exchanges," said Brian Taylor of BTA Consulting, which advises exchanges.
In Europe, smaller exchanges themselves such as Euronext (ENX.PA) and BME (BME.MC) would be forced to respond to the increased competition from a combined LSE-Deutsche Boerse to avoid being squeezed out, said Christian Voigt, senior regulatory adviser in London at Fidessa, which builds trading systems.
"All those medium-sized exchange groups ... will be forced to find an answer," he said. "If you are stuck in such a position, you either have to start to grow or focus on a niche or specialty areas so that you can differentiate yourself."
A source close to France-based Euronext, which was split from NYSE in 2014, said continuing with its strategy of maintaining its independence was no longer tenable, even if the LSE-Deutsche Boerse merger did not go ahead.
Euronext and Spain's BME declined to comment.
A London-Frankfurt merger could also pose problems for U.S. exchange Nasdaq (NDAQ.O). It would risk falling further and further behind a Big Four as it does not have the same global reach or a strong presence in derivatives trading and clearing - among the industry's highest-growth and margin businesses.
"I do think that (LSE-DB) would be pretty much the last of the mega mergers and poses an interesting question for Nasdaq. Do they need to do a deal, what is their focus?" said Rich Daniels, senior analyst at TABB Group in New York.
Nasdaq declined to comment.
Until the slowdown in China's economy, Asia was seen as a promised land for western exchanges wanting to tap the region's growth and realize a dream of becoming truly global platforms.
However national political barriers make foreign takeovers in Asia more difficult than elsewhere, BTA Consulting's Taylor said. In 2011 Australia banned an attempt by the Singapore Exchange to buy the Australian Stock Exchange to avoid a foreign country having too much sway in its financial center.
Analysts say Asian exchanges are more likely to snap up western peers rather than the other way round.
The Hong Kong Exchanges & Clearing bought the London Metal Exchange in 2012, while Singapore's SGX exchange is among the suitors for London's Baltic Exchange.
"I don't think any country in Asia is ready to open up to foreign ownership," TABB Group's Daniels said. "I don't think that politically it is time for Asia to be part of truly global consolidation."
CLEARING & BREXIT
The proposed London-Frankfurt merger has not yet been formally put to regulators, but a major area of competition concern could be derivatives clearing, as LSE's LCH.Clearnet and Deutsche Boerse's Eurex Clearing are already the dominant players in Europe.
Industry experts said the British company could spin off the French half of its clearing house in a bid to assuage regulators.
LSE and Deutsche Boerse declined to comment.
A core reform from the global financial crisis is forcing large chunks of the world's $550 trillion derivatives market to pass through a clearing house to complete the trade even if one side of the transaction goes bust.
The lucrative service becomes mandatory for interest rate swaps in the European Union from June, and ICE and CME have both opened clearing houses in the region in the past five years.
"A DB-LSE tie-up would create a European clearing powerhouse that would pose more challenges for U.S.-based ICE and CME in building a European swaps and futures business," Benn Steil, a senior fellow at the Council on Foreign Relations think-tank in New York.
But other factors could also shape the industry's European landscape, such as if Britain, home to the region's biggest financial center, votes in June to back "Brexit" and leave the European Union.
The EU is putting in place reforms to create a capital markets union to help companies raise more money by issuing bonds and floating on stock exchanges, but exchanges would need to have a presence in the bloc to exploit this.
While the LSE and Deutsche Boerse say their merger would be Brexit-proof, Britain leaving the EU could force other exchanges with European headquarters in London - such as BATS Chi-X, ICE and CME - to review where they should be based.
(Additional reporting by Noor Hussain in Bangalore, John McCrank in New York, Alexandre Boksenbaum-Granier in Paris, Jonathan Gould in Frankfurt, and Jesus Aguado in Madrid; Editing by Pravin Char)