EU deepens probe of Deutsche Boerse, NYSE merger

August 4, 2011 - 12:30 PM

BRUSSELS (AP) — The European Union's competition regulator deepened its probe into the planned takeover of NYSE Euronext by Deutsche Boerse Thursday, citing concerns over the combined exchange's weight in derivatives trading and clearing.

The $10 billion takeover would create the world's largest exchange, which would not only control important stock markets on both sides of the Atlantic, but also have a potentially dominant position in the trading of derivatives. Derivatives are complex financial products that allow investors to bet on movements in areas such as interest rates, stock indexes or commodity prices.

"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," the EU's Competition Commission Joaquin Almunia said in a statement. "The Commission needs to make sure that markets which are at the heart of the financial sector remain competitive and efficiently deliver to users."

The in-depth probe gives the Commission until Dec. 13 to decide on whether to approve the takeover and what, if any, concessions to demand from the two companies to mitigate competition concerns.

Deutsche Boerse said the Commission's decision "was fully anticipated and does not in any way prejudge or prejudice the ultimate outcome."

The merger would combine Europe's two largest derivatives markets, Deutsche Boerse's Eurex and NYSE's Liffe.

It would also extend Deutsche Boerse's business model of integrated trading and clearing to the world's largest exchange, potentially giving it the power to control prices or lock competitors out of some of the most lucrative areas of financial markets.

Deutsche Boerse runs a so-called vertical silo, in which trades made on its exchanges are also channeled to its clearing house. Having one dominant exchange in charge of such a silo could make it very difficult for a rival company to set up a clearing business, the Commission said.

A clearing house acts as intermediary between buyers and sellers and absorbs losses if one party defaults.

The Commission said it is concerned that "the merger would have a negative impact on innovation in derivatives products and technology solutions," and reduce fee competition among different exchanges. It said higher prices could hurt pension funds, mutual funds, retail banks, as well as professional brokers and investment banks.

The takeover has already been approved by competition regulators in the U.S.