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Banks, Financial

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Categorized | Financial

Brussels to probe LSE-Deutsche Börse merger

Posted on September 28, 2016

Combo of file pictures shows (right) the entrance to the London Stock Exchange LSE (in London on March 4, 2016) and the bull and bear statue in front of the Deutsche Boerse German stocks operator (in Frankfurt am Main on May 26, 2014). Deutsche Boerse and the London Stock Exchange on March 16, 2016 agreed to press ahead with their planned merger to create one of the world's biggest exchanges, insisting the tie-up will succeed irrespective of the outcome of the looming Brexit vote on Britain's future in the EU. Leon NEAL Daniel ROLAND / AFP©AFP

Antitrust regulators in Brussels are to open an in-depth investigation of London Stock Exchange Group’s plan to merge with rival Deutsche Börse amid concerns a deal could damage many of Europe’s capital markets.

The deal to create Europe’s largest exchanges operator was expected to go to a second phase but Wednesday’s statement, at the end of an initial analysis, is the first time Brussels has outlined its concerns.

    The European Commission cited fears the deal could reduce competition in clearing, derivatives trading, German stocks, Italian futures and options markets and the repo market, which provides a crucial source of short-term funding for banks.

    “Financial markets provide an essential function for the European economy. We must ensure that market participants continue to have access to financial market infrastructure on competitive terms,” said Margrethe Vestager, the EU competition commissioner.

    A favourable decision from Brussels is one of the key hurdles as the companies seek to connect London, Europe’s largest financial hub, with Frankfurt, home to the European Central Bank and centre of settlement, clearing and payments for the euro, as well as Italy’s main markets.

    Competition and prudential regulators in Britain and Germany are assessing whether the UK’s decision to leave the European Union has profoundly altered the deal terms. Brussels will treat the UK as part of the union. Shareholders have already approved the deal.

    The combination would create one of the biggest venues for equities listings and market data, and risk-manage more derivatives trades than any other entity in the world.

    Central banks will also assess whether linking two of the world’s largest clearing houses will pose a threat to the stability of financial markets. Clearing, in which a party stands between two sides of a deal and manages fallout if one side defaults, is one of the pillars of global policymakers’ efforts to reinforce markets after the financial crisis.

    London’s LCH, majority owned by the LSE, is the world’s largest clearer of interest rate swaps; Deutsche Börse’s Eurex is Europe’s main home for trading long-dated interest rate futures.

    The two companies promise to offer their banking customers, hit by onerous capital requirements, millions of dollars of savings by netting the margin on their derivatives portfolios. A combined company would control €150bn, the largest margin pool in the world.

    We must ensure that market participants continue to have access to financial market infrastructure on competitive terms

    – Margrethe Vestager, EU competition commissioner

    A so-called phase II investigation will last 90 working days, although it can be extended if the companies offer potential concessions. It is set to conclude by February 13.

    It will study the LSE and Deutsche Börse’s view the deal will save them €450m a year from 2020. It will also receive technical evidence submitted by market participants and rivals, and that is set to kick off fierce lobbying from rivals.

    Michel Sapin, French finance minister, has criticised the deal and the Netherlands, Belgium and Portugal have written letters cautioning it could undermine the attractiveness and functioning of their local stock markets. Euronext, the Paris-based exchange which runs stock markets in each country, would see its €2.8bn market capitalisation dwarfed by the LSE-Deutsche Börse combination.

    A planned merger between Deutsche Börse and NYSE Euronext was blocked four years ago after an in-depth investigation from Brussels, which ruled that it would have created a monopoly in European futures markets.