Deutsche Boerse-NYSE Said to Face Monopoly Warning From EU

Deutsche Boerse AG (DB1) and NYSE Euronext (NYX) were told by European Union regulators that their deal to create the world’s largest exchange would monopolize derivatives trading in Europe, according to a person familiar with the situation.

The European Commission’s antitrust complaint said that the companies’ trading arms directly compete, rejecting claims by Deutsche Boerse and NYSE Euronext that they aren’t rivals because Eurex specializes in longer-term debt products and NYSE Liffe in short-term interest-rate contracts, said the person who couldn’t be named because the EU’s statement of objections is confidential.

Deutsche Boerse and NYSE Euronext are defending their proposed $7.27 billion deal at a hearing before regulators in Brussels today against EU criticism that the combination may harm competition and hobble innovation in financial markets. The EU’s antitrust authority can block anti-competitive deals or require companies to sell off units or change the way they do business to eliminate antitrust concerns.

Regulators also cast doubt on arguments from the exchanges that their combined power over exchange-traded derivatives wasn’t a problem because of competition from over-the-counter products, the person said. The EU’s complaint said that the two parts of the market are “incompatible” with each other.

‘Direct competitor’

Deutsche Boerse argued today that “OTC markets are a direct competitor to regulated markets,” Andreas Preuss, its deputy CEO said in an e-mailed statement.

“The derivatives market is a global market dominated by over-the-counter trading,” Preuss said “OTC volumes are substantially bigger than exchange traded volumes.”

The companies planned to cite “a lot of benefits” of the deal at the hearing, NYSE Euronext Chief Executive Duncan Niederauer said in the transcript of video message filed with U.S. regulators earlier this week.

NYSE planned to argue that draft legislation intended to open up financial markets to competition may answer some EU concerns on shrinking rivalry, Niederauer said, adding that competition for exchanges “is clearly global.”

The Brussels-based European Commission sent the companies a formal antitrust complaint in October. The deal would put more than 90 percent of the region’s exchange-traded derivatives market and about 30 percent of European stock trading in the hands of one organization. The regulator separately cited concerns over reduced innovation in derivatives and technology.

Expanded Probe

The face-off between regulators and the companies is the latest step in a process that started June 29 when the companies sought regulatory approval to merge. The commission said in August it will conduct an expanded probe and has set a Dec. 22 deadline to give its final opinion.

The commission declined to comment because the hearing is private.

The hearings offer “an opportunity for the exchanges to respond to the concerns in person,” said Richard Perrott, exchange analyst at Berenberg Bank in London. “Deutsche Boerse and NYSE are looking to offer as few concessions as possible and the commission is looking to wrest as many as possible.”

Deutsche Boerse and NYSE Euronext today said they will each buy back stock before the end of the year. Deutsche Boerse will acquire 100 million euros ($141 million) of its own shares and New York-based NYSE Euronext will repurchase $100 million, the companies said in separate statements today. NYSE said its buyback will start after it reports third-quarter earnings on Nov. 3.

Deutsche Boerse raised its forecast for cost saving in 2011 to 130 million euros from 115 million euros. The exchange also today said third-quarter earnings before interest and taxes excluding certain items climbed 46 percent to 356.4 million euros. Revenue rose 20 percent to 604.7 million euros.

To contact the reporters on this story: Aoife White in Brussels at awhite62@bloomberg.net. Nandini Sukumar in London at nsukumar@bloomberg.net

To contact the editor responsible for this story: Christopher Scinta at cscinta@bloomberg.net.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.