European competition officials have recommended blocking the tie-up between Deutsche Börse and NYSE Euronext, the German and U.S. exchange operators, setting in motion three weeks of frantic lobbying to salvage the deal.
Joaquin Almunia, the European competition commissioner, has told the merger parties that he plans to prohibit the bid to create the world's biggest exchange group unless they are willing to sell off one of the groups' derivatives businesses – a step executives refuse to take.
Mr. Almunia's case team has drafted an official recommendation to disallow the deal because it will create a dominant player in European exchange traded derivatives markets, stifling competition from potential new entrants, according to two people involved in the process.
A combination of the German and U.S. groups would unite their two European futures exchanges, Eurex and Liffe, handing the combined entity more than 95 per cent of trading in benchmark short-term interest rate and German government bond futures.
The antitrust decision is a serious blow to the likelihood that the German and U.S. groups will be able to complete their deal, and highlights how competition concerns have emerged to help scupper a year-long wave of attempted exchange consolidation.
Blocking the tie-up also sends a signal to global derivatives exchanges that European antitrust authorities believe the time has come to take a stand against a business model that has allowed exchanges to build up dominant positions in futures trading.
Mr. Almunia's staff rejected arguments by Deutsche Börse and NYSE that the market for exchange-traded derivatives is global and the merged group would still face competition from CME Group in the U.S. They also refused to agree that off-exchange or over-the-counter derivatives competed against exchanges.
The draft decision has been sent to other Brussels departments for their comments before being submitted to a committee of competition experts from European Union member states, who can offer non-binding advice on the judgment.
There is still a slim possibility of the recommendation being overturned if the exchanges marshal enough political backing for the deal – particularly from Angela Merkel, the German Chancellor – to sway opinion in Brussels.
The exchanges have signalled they are determined to see the process through to the bitter end and are mounting a vigorous lobbying campaign to win over key figures, including key EU commissioners, finance ministers and the leaders of France and Germany.
The formal approval for the prohibition is expected to be taken by the college of European commissioners on Feb. 1, ahead of the Feb. 9 deadline for a decision.
The recommendation by Mr. Almunia's department will be welcomed by exchange rivals such as Nasdaq OMX and the London Stock Exchange.
Yet Europe's move stands in contrast to the position in the U.S. and Asia, where there are no imminent moves to open futures markets to wider competition. Industry experts say this could create an unlevel playing field for Europe.
Decisions to block mergers are extremely rare, not least because merger parties some time withdraw their application if a negative decision looks unavoidable. It is even more unusual, but not unprecedented, for prohibition recommendations to be overturned at the last minute.
The antitrust decision comes almost a year after Deutsche Börse and NYSE Euronext unveiled a $9-billion (U.S.) deal to create the world's largest exchange that would be home to the most company listings and have four times the revenue of the LSE.
The German and U.S. groups had offered two rounds of concessions to Brussels in an attempt to overcome competition concerns, including allowing rival bourses some access to the combined group's German clearing house and selling some derivatives businesses.
A spokesman for Mr. Almunia declined to comment on the decision. Deutsche Börse was not immediately available for comment. NYSE Euronext declined to comment.