Today, the Commission has decided to prohibit the proposed merger between Deutsche Börse and the London Stock Exchange Group.
The European economy depends on well-functioning financial markets. That is not just important for banks and other financial institutions. The whole economy benefits when businesses can raise money on competitive financial markets.
That requires effective competition on the financial infrastructure markets. They allow financial instruments, like shares and bonds, to be bought and sold. Those markets are already concentrated, with a small number of large operators.
How exactly these markets work and the products traded can seem like rocket science. But actually our competition concerns with this merger are very simple: In some markets, Deutsche Börse and London Stock Exchange both provide the same services. And in some of these markets they are essentially the only players and the merger would therefore have led to a de facto monopoly. So our concerns were very serious
The Commission’s role is to make sure that mergers in the EU do not weaken competition. And we could not approve this merger on the terms which the two companies proposed.
So what were our concerns in detail?
Our investigation showed that the merger raised three main issues. They all relate to clearing services.
Clearing services essentially ensure the execution of trades made on stock exchanges. They are provided by clearing houses, which sit in between the two trading parties – the seller and the buyer. What they do is assume the risk of default of each trading party vis-à-vis the other. Thus, clearing houses are essential for the stability of financial markets. They avoid a domino effect if one party defaults.
This merger raised concerns in relation to clearing services for two types of assets. The first was fixed-income instruments, namely government bonds and repurchase agreements. The second was single stock equity derivatives – contracts whose value is linked to the price of an underlying share.
Our first concern related to the clearing of fixed-income instruments. Here, the proposed merger would have created a de factomonopoly.
As well as owning the stock exchanges of Germany, Italy and the United Kingdom, the two companies also own three of the largest European clearing houses. Those are Eurex, which is owned by Deutsche Börse, and the London Stock Exchange Group’s two clearing houses LCH.Clearnet and CC&G.
Deutsche Börse and the London Stock Exchange are basically the only companies that provide fixed income clearing services in Europe. Last year, 3.4 trillion euros worth of bond trades alone were cleared in the European Economic Area. Almost all of that was cleared by the clearing houses of Deutsche Börse and the London Stock Exchange Group.
Our second concern was also the result of this de facto monopoly in fixed-income clearing. Our investigation showed that it would have had a knock-on effect on downstream markets. Namely, those for the settlement, custody and collateral management of fixed income instruments. These are markets that deal with important tasks like making payments in exchange for the delivery of financial instruments. As well as managing the money or other financial assets deposited to guarantee the executions of trades.
Companies that are active on those markets depend on a flow of transactions from the clearing houses – a so-called transaction feed.
At the moment, Deutsche Börse’s subsidiary Clearstream competes on those markets with other companies. And its main competitor, Euroclear, depends on transaction feeds from the London Stock Exchange Group. We were concerned that after the merger, the merged entity would have diverted those feeds to Clearstream, denying Euroclear the flow of transactions that it depends on.
Our third concern was that the merger would have reduced competition for trading and clearing another type of product, single stock equity derivatives. For these products, trading and clearing are provided together as a bundle. At the moment, Deutsche Börse competes via its derivatives exchange called Eurex. It offers both trading and clearing. Its main competitor in this area is Euronext. Euronext offers a bundle made up of its own trading services and clearing which it gets from the London Stock Exchange Group. So, Eurex and Euronext now compete head to head on single stock equity derivatives based on stocks of a number of European companies. The merger would have removed this competition.
We could not allow the merger to go ahead unless these serious problems were resolved. For mergers between direct competitors, we generally prefer a structural remedy to our concerns because they can resolve those concerns once and for all.
The companies did offer to sell off LCH.Clearnet SA, a clearing house based in France and owned by the London Stock Exchange Group. That would have answered our concerns relating to single stock equity derivatives. But it would not have been an effective solution to the de facto monopoly in fixed-income clearing.
This is what came out of the market test of the remedy.
Market testing is an important part of our merger review process. We use it to get a better understanding of whether the proposed remedies can work in practice, by collecting the view of customers, competitors, and others in the marketplace.
In this case, the market test showed that just selling LCH.Clearnet SA wouldn’t have been effective. That is because that clearing house depended on a trading transaction feed from a platform called MTS. And MTS is owned by the London Stock Exchange Group. In other words, after the merger LCH.Clearnet SA would have been dependent for business on its main competitor, the merged entity. The latter would have been likely to divert those feeds to its own clearing houses. The business which LCH.Clearnet SA relied on could therefore have disappeared.
So we weren’t satisfied that LCH.Clearnet SA would have been a viable competitor in the long term. And that meant that its sale on its own didn’t resolve our concerns. We could still have ended up with the same problem after the merger.
There was a solution to that problem. The London Stock Exchange could have sold MTS, which is a small business compared to the overall size of the two companies. But in the end, the London Stock Exchange decided not to do that.
Instead, they submitted an alternative offer at a very late stage of the procedure. This alternative offer consisted of a complex bundle of behavioural measures in addition to the divestment of LCH.Clearnet SA. But the parties were unable to demonstrate that these measures would have been effective. They would not have made LCH.Clearnet SA a viable competitor in clearing fixed income products in the long term.
Some people have wondered why the issue of selling MTS only came up late in the procedure. They suggest that we should have raised this issue earlier. But I don’t agree with that.
As I mentioned, LCH.Clearnet SA’s dependence on MTS became clear as a result of the market test. And that’s exactly why we have market testing in the first place. It’s not uncommon for us to find that after the market test, we need to go back to the merging companies to ask them to improve the remedy.
Our merger reviews work to tight deadlines. Those deadlines serve the interests of the companies that are merging. In the absence of a negative decision adopted within the deadline, they will be able to go ahead and put the merger into effect. So, they of course also need to do their part, and meet the deadlines that apply to them. This includes the deadline for submitting remedies to solve our concerns. The later we get those proposals, the less time we have to review them – and the less time the parties have after the market test to improve them. In this case, the parties proposed the initial version of the remedies only minutes before the deadline.
That reduced the time they had after the market test to improve their proposals. Still, they had the chance to answer our concerns, by offering to sell MTS. But they were not prepared to do that.
The Commission cannot allow the creation of monopolies. That is what would have happened in this case. That is why we have prohibited this merger, for the benefit of competition in European financial markets.
Thank you for your attention.
