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EU deepens probe of NYSE-Deutsche Boerse merger

The New York Stock Exchange


EU antitrust regulators have opened an in-depth probe into the proposed $9-billion merger of Deutsche Boerse AG and NYSE Euronext Inc., citing concerns about competition in derivatives trading and clearing.

EU Competition Commissioner Joaquin Almunia had flagged the move several times in the past couple of months. The investigation could run the rest of the year, and comes after a month-long preliminary review that ended on Thursday.

Regulatory approval in Europe and the United States is the last hurdle before Deutsche Boerse can buy NYSE Euronext and create the world's largest exchange operator, handling stocks, futures, options and clearing in several countries.

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"The proposed merger would remove a strong competitor from the market and would give the merged company by far the leading position in derivatives trading in Europe," Mr. Almunia said in a statement Thursday.

In a joint statement, the Frankfurt- and New York-based bourses said they were confident the European Commission would clear the combination, which was announced in February amid a rush of industry merger plans globally.

While other deals have fallen apart – including those of London Stock Exchange Group PLC, Singapore Exchange Ltd., and Nasdaq OMX Group Inc. – the proposed German-U.S. tie-up remains on track after having received shareholder approval last month.

The Commission, which has until Dec. 13 to decide whether to clear or block the deal, said the initial review indicated concerns in a number of areas, especially in derivatives trading and clearing.

"Due to the removal of an important competitor, the merger would have a negative impact on innovation in derivatives products and technology solutions," the European Union executive said.

It said rivals may find it more difficult to enter the market, which may lead to reduced fee competition affecting pension funds, mutual funds, retail and investment banks and brokers.

Deutsche Boerse shares closed down 5.1 per cent at €48.10 ($67.81 U.S.) after a late-day slide, while NYSE Euronext shares were off 4.8 per cent at $29.73, as markets globally tumbled on worries about European debt and the U.S. economy.

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The review is complicated and somewhat unprecedented for the Commission, because it must consider derivatives and over-the-counter markets, as well as the clearing of those products, in today's electronic and global marketplace.

Markets have transformed since the last wave of trans-Atlantic mergers, in 2006-08, when the New York Stock Exchange parent bought Euronext, among other deals.

Together, Deutsche Boerse and NYSE Euronext would have a tight grip on exchange-based European futures trading, raising worries among rivals who have both publicly and privately lobbied against the deal.

"You can definitely rely upon competing exchanges being aggressive in making their voices heard through the remainder of this process," said Justin Schack, managing director of market structure analysis at New York-based broker Rosenblatt Securities.

"We've seen that already with LSE and Nasdaq, trying to argue that the deal would be harmful. It wouldn't surprise me to see other competitors joining that chorus."

The Commission said the lack of access to the merged company's enlarged post-trade clearing facilities, due to its "vertical silo" model, may hinder rival derivatives platforms seeking entry.

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A clearinghouse stands between parties to a trade and guarantees obligations. Clearing, meanwhile, has emerged as a big part of a debate in Europe over how to revamp markets in the wake of the 2007-09 financial crisis.

There is also concern over the deal's impact on equities trading and settlement, and index licensing, the Commission said.

Deutsche Boerse and NYSE Euronext said the benefits of the deal included a bigger player able to compete effectively with OTC platforms, other exchanges and banks. They also pointed to the $3-billion in capital efficiencies for customers.

NYSE Euronext chief executive officer Duncan Niederauer, who would be CEO of the combined entity, said on Tuesday he expects the Commission to consider placing conditions on the merger, and not focus on how to "make or break" it.

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