12.23.2011
By Terry Flanagan

DOJ Approves NYSE-DB

The U.S. Department of Justice has approved the merger between Deutsche Borse and NYSE Euronext, removing a key regulatory hurdle of the deal.

Removing another hurdle in the path to the deal’s closing, the U.S. Department of Justice has given the green light on the proposed merger between Deutsche Borse and NYSE Euronext, contingent on the International Securities Exchange divesting its stake in Direct Edge.

“Without the divestiture and other restrictions obtained by the Justice Department, a combined NYSE and Deutsche Borse entity could influence the actions of Direct Edge, and thereby lessen the zeal of an aggressive and innovative exchange competitor,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “The remedy ensures that participants in the markets for U.S. equities exchange products and services will continue to receive the full benefits of robust competition in the form of competitive prices and increased innovation.”

“This represents an important regulatory milestone for the merger,” said Deutsche Borse in a statement. “The DOJ’s clearance was contingent upon the International Securities Exchange agreeing to sell its 31.5% stake in Direct Edge, a U.S. stock exchange. Until completing the divestiture, ISE’s ownership in Direct Edge will be held passively.”

The International Securities Exchange is 100% owned by Eurex, which is the U.S. derivatives exchange became a wholly owned subsidiary of Direct Edge. In return, ISE gained a minority stake in Direct Edge. Eurex is a joint venture between Deutsche Borse and the SIX Swiss Exchange.

The merger of Deutsche Borse and NYSE Euronext is subject to further closing conditions, particularly in Europe, where the combined entity would have a near stranglehold on derivatives. The approval from the EU Commission is still pending. The Commission is expected to make a final decision no later than February 9, 2012. Further approvals by the relevant national stock exchange supervisory authorities are also outstanding.

Last week, NYSE and Deutsche Borse offered up additional remedies to the competition commission, a month after turning in their initial concessions regarding their proposed merger.

Under the new set of concessions, NYSE and Deutsche Borse have “improved” on their existing remedies by including all of their NYSE Liffe-operated European single equity derivatives business, including those in Amsterdam, Paris, Brussels and Lisbon. They will also offer to whoever ends up purchasing the single equity derivatives business access to Eurex Clearing.

NYSE and Deutsche Borse agreed to their $17.7 billion merger in February, with shareholders approving the deal in July. Regulators outlined their objections in a statement in early October, with oral hearings held later that month. Their initial batch of remedies was submitted in mid-November. The companies expect to save as much as $3 billion in capital requirements through the deal, as well as reduce any duplicative infrastructures and operations.

Aside from the European Competition’s concerns, the deal also faces another hurdle from the regional regulator for Frankfurt’s Deutsche Borse.

The Hessian Ministry of Economics is a local regulator in Deutsche Borse’s home state of Hesse. On Monday, the ministry’s Ulrike Franz-Stoecker said that they have “legal reservations” about the deal, and submitted a list of suggested amendments and concessions to the merger partners to help rectify their concerns. No other details regarding their issues with the deal have been released. NYSE and Deutsche Borse will have a chance to respond to the Hessian authority.

The Hessian Ministry of Economics has the power to revoke Deutsche Borse’s operating license, which would essentially kill the deal. It intends to make its final decision after the European Competition Commission gives its verdict.

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