On February
1, 2012, the European Commission has declared the intended merger of
Deutsche Börse and NYSE incompatible with the common market and,
therefore, blocked the intended concentration.
Under the
applicable EU legislation, the decision-making process is as follows:
Prior
Debate
Prior to
yesterday's decision, Deutsche Börse and NYSE on the one hand and
the European Commission on the other hand, had vividly exchanged
arguments in favor and against the agreed merger.
Contra Merger
- The merger would create a dominant player in European exchange-traded derivatives markets, stifling competition from potential new entrants.
- The merger would unite the 2 main European futures exchanges, Eurex and Liffe, and confer 95 per cent of trading in benchmark short-term interest rate and German government bond futures to NewCo.
Pro Merger
- The market for exchange-traded derivatives is global, not regional, and the merged group would still face competition from CME Group in the US.
- Even after the merger, NewCo would still face competition from over-the-counter derivatives markets.
- Merging Deutsche Börse and NYSE would free collateral posted by clients and, therefore, bring market benefits.
- Eurex (part of Deutsche Börse group) and Liffe (part of NYSE group) do compete on equity options. However, they do not compete on their main product, e.g. interest rate and government bond futures. This is because Liffe's main offer includes (short-term) Euribor interest rate futures while Eurex's main offer includes (long-term) German bond futures.
Decision
of the European Commission
Yesterday's
press releases announce the blocking of the intended merger and
outline the basic reasoning of the European Commission. However, it
must be noted that an extensively motivated decision has not been
published yet. The exact reasoning of the European Commission will,
therefore, only be known at a later stage.
European
vs. global market
In the last
months, the debate was mainly about the question whether the European
Commission had correctly appreciated the global nature of the market
for exchange-traded derivatives.
First of
all, from an economic perspective, it makes no sense to talk about a
European vs. a global market: The market is a pure process by which
buyers and sellers determine what they are willing to buy and sell
and on what terms, e.g. quantities and prices of goods and services.
Therefore,
what counts is to fix the product scope clearly and then to
appreciate the process how supply and demand for this specific
product match.
From a legal
perspective, European law introduces a local component. However, it
does so to distinguish between the competency of member state
authorities and EU authorities and not to appreciate the market
structure itself.
In its
decision, the European Commission defines the market as financial
derivatives whose underlying are European interest rates, European
stocks, or European equity indexes. As a matter of fact, we should
avoid any confusion about European underlying and European market.
The European
Commission holds that there is no significant offer for derivatives
on the above cited European underlying from CME or other exchanges in
the world and, therefore, concludes that the merger would lead to a
quasi monopoly.
Exchange-traded
vs. OTC derivatives
The European
Commission refutes the argument that OTC derivatives markets would
still provide a significant level of competition to the merged
exchange-traded derivatives market. This is because exchange-traded
derivatives are, as opposed to OTC derivatives, fully standardized
and their cost structure and trading partners differ substantially.
Reduction
of collateral postings
The European
Commission recognizes that a merger would lead to clients posting
less collateral, even though it holds that such gains would be
significantly lower than argued by Deutsche Börse and NYSE.
Nevertheless, it considers that such efficiencies cannot offset the
downsides of the merger.
Looking at
the above schema, this seems reasonable: The merger is certainly not
indispensable to obtain a reduction of collateral.
Short-term
vs. long term underlying
The European
Commission does, subject of its more detailed decision to be issued,
not discuss this argument. It only states that “Eurex and Liffe
are of comparable size in terms of their membership base and
portfolio of contracts they offer for trading and clearing, and they
both focus on European financial derivatives, namely European
interest rate and equity derivatives”.
References:
- Art. 101 et seq. Treaty on the Functioning of the European Union
- EC Council Regulation No. 139/2004
- European Commission Press Releases dated February 1, 2012
