European Union competition regulators have whittled down their concerns about the merger of Deutsche Boerse (DB1Gn.DE) and London Stock Exchange Group (LSE.L) to focus mainly on clearing of derivatives contracts, two sources familiar with the situation said.
The EU’s executive European Commission, which must approve the merger for it to go ahead, is due to send a letter to the two exchanges this week setting out remaining concerns about a deal that would create Europe’s dominant bourse.
“Clearing is seen as one of the main concerns,” one of the sources said. Clearing ensures that a trade is completed even if one side of a deal goes bust, as it can call on a default fund to cover losses.
The letter does not formally take into account an earlier announcement by the London exchange to sell the French half of its LCH clearing house in a bid to appease competition concerns in Brussels, the sources said.
Clearing has become a major issue because, following global reforms introduced after the 2007-09 financial crisis, banks must clear the bulk of their derivatives trades to make them safer and more transparent.
Clearing is therefore set to grow and customers don’t want to be trapped without choice.
The EU executive initially had about 25 areas of concern, ranging from trading to clearing and stock indices, but is now focusing on about five, in particular derivatives clearing, the sources said.
Deutsche Boerse, LSE, and the European Commission all declined to comment.
Major savings touted for the merger would come from big banks being able to save on how much cash or margin they would have to set aside to cover the risk of their derivatives trades defaulting.
Deutsche Boerse owns Eurex Clearing, a major clearing house for derivatives trading on an exchange. The London Stock Exchange controls LCH, one of the world’s biggest clearing houses for derivatives traded off exchanges.
Savings would be made by “netting” off positions in the two markets, thereby reduce the amount of cash needed to cover positions.
Brussels has until March 6 to decide on the merger, which is already in the second, deeper stage of the investigation.
The deal faces opposition from Euronext ENXT.PA, the stock exchange which trades shares in Paris, Amsterdam, Brussels, and Lisbon. If the merger goes ahead, Euronext is seen as a likely buyer for Clearnet, the French arm of LCH.
Deutsche Boerse and the LSE could be forced to offer more concessions, such as withdrawing from clearing some products, but selling off Eurex Clearing itself or LCH’s core derivatives clearing operation would be a deal breaker, the sources said.
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Source: Reuters.com
