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Commission blocks Deutsche Bӧrse and NYSE Euronext merger
On 1 February 2012 the European Commission (the “Commission”) announced its decision to prohibit the merger between Deutsche Bӧrse and NYSE Euronext. The Commission concluded that the merger would bring together the two largest financial derivatives exchanges in the world, Liffe and Eurex. The Commission determined that the merger would result in the establishment of a quasi-monopoly in relation to European financial derivatives traded globally on exchanges (European interest rates, single stock equity and equity index derivatives).
The Commission determined that the relevant market for derivatives depended upon the level of standardisation of the product. Therefore derivatives traded through a dealer network called over-the-counter derivatives (“OTC” derivatives) and exchange-traded derivatives (“ETDs”) formed separate markets.
Furthermore, contrary to the parties’ arguments that this was a global market, the Commission identified that the relevant geographic market depended upon the underlying asset upon which the derivative was based, therefore the relevant market was that of European ETDs.
The Commission found that Liffe and Eurex were each other’s closest competitors in the market for ETDs based on European interest rates or equities as this formed the focus of both parties’ business. Both are also of a similar size, possessing a large membership base and a large portfolio of contracts which they offer to trading and clearing. The Commission also found that Eurex and Liffe exert strong competitive pressure on each other in relation to those contracts where they compete as well as those contracts where the liquidity has settled on one of their platforms. The mere threat of customers switching from one of these exchanges to the other has in the past prompted fee cuts and innovation. This would be lost post-merger.
According to the Commission, no other competitor can match the parties’ offering or margin pool. Other companies which provide similar services worldwide exert a weak constraint on the parties. Chicago Mercantile Exchange (“CME”) for example, has a limited presence in derivatives based on European underlyings and only competes marginally in certain asset classes. In particular the CME could not provide comparable collateral savings to those offered by the parties. The Commission therefore considered it unlikely that CME would be a credible competitive force to constrain the merged entity. Post-merger, users of these contracts would therefore have no choice but to use the merged entity. As a result of the loss of competition between the two exchanges, the merged entity would be able to raise prices and reduce innovation in derivatives products and technology solutions.
In addition the Commission found that the merged entity would be able to raise barriers to entry which were already high by refusing rival derivatives platforms access to its post-trade clearing facilities. This was because Eurex and Liffe both operate closed vertical silos linking their exchange to their own clearing house. The merger would have resulted in a single vertical silo which would have traded and cleared over 90% of the global market for European ETDs. Post-merger, entry by a competitor would have been more difficult as customers would prefer the advantages offered by the merged entity of clearing similar contracts in a single clearing house. This would reduce the possibilities for fee competition and have a negative impact on customers such as mutual and pension funds, professional brokers and investment banks as well as retail banks.
The Commission was also concerned about the effect of the transaction on equities trading and settlement and index licensing.
Pro-competitive benefits of the merger
The Commission rejected the parties’ arguments that the merger would benefit customers by offering greater liquidity and by reducing the collateral they have to post as security, considering that there was no evidence that liquidity would be likely to increase as a result of the merger and in fact evidence suggested that competition rather than consolidation generated liquidity gains. It acknowledged that the merger may lead to some collateral savings as a result of increased cross-margining opportunities, but these savings were not significant enough to outweigh the harm to consumers and could partly be achieved without the merger. This is because the relevant measure for actual cost savings is not the collateral savings but the benefits that can be gained by using this money for the best alternative purpose.
Remedies offered by the parties were rejected as insufficient to allay the Commission’s concerns, difficult to implement and unlikely to be effective.
- The Commission considered that a divestment of Liffe’s European single stock derivatives business was too small and not diversified enough to be a viable stand-alone business. There was also a likelihood that customers would trade out of their positions rather than transferring to a new acquirer, thereby eroding the transferable open interest.
- The parties offered access to the merged entity’s clearing house for materially new interest rate, bond and equity index derivatives contracts. However the Commission’s market test revealed that no contracts would satisfy the criteria for access.
- The parties also offered to licence Eurex’s interest rate derivatives software. The Commission considered this remedy of little use as most competitors already had their own software.
- (The parties also pledged not to increase prices for three years, although this was not offered as a formal commitment. The Commission rejected this pledge as ineffective as it was based on list prices while actual prices are based on rebates. In any case, this commitment would be difficult to implement and monitor).