A favorite parlor game among European financial types is trying to guess which of the major exchanges--Euronext, the Deutsche Börse in Frankfurt, or the London Stock Exchange--will eventually dominate securities trading. With 20-odd bourses, plus a dozen or so derivatives markets, each with its own fees and rules, trading in Europe is costly and inconvenient. Consolidation is crucial, everyone agrees, but the exchanges are fierce rivals. Whenever one tries to orchestrate a merger, another checks the move. The result: status quo.
Lately, though, the deal wheels have been turning. On Oct. 30, Euronext, the Paris-based Franco-Belgian-Dutch exchange, won an $830 million bid to buy the London International Financial Futures & Options Exchange (Liffe). After the offer, which will integrate its derivatives trading with Euronext's stock business, the financial press promptly anointed Jean-Francois Théodore, Euronext's avuncular chairman, the new king of Europe's bourses.
But two days later, Werner Seifert, the pugnacious chief executive of archrival Deutsche Börse, retaliated. In a move to give DB a lock on clearing and settlement, the dull but lucrative business of processing trades, Seifert launched a bid to buy the 50% of Clearstream International that DB does not already own. The amount proferred for Clearstream, a Luxembourg clearing-and-settlement house, was $1.1 billion, according to knowledgeable sources.
Control of Clearstream, which handles 40% of European stock and bond trades and already generates a third of DB's aftertax profits, would give Seifert command over every aspect of many of the trades his exchange handles. Seifert's hope is that if DB can offer lower trading costs, institutional investors will flock there to buy and sell stocks, encouraging more listings and boosting Frankfurt's stature. As it stands, about 30 clearing operations exist in Europe, resulting in fragmented service--and cross-border settlement costs that are seven times as high as for trades in the U.S.
BIG SAVINGS. But Seifert faces stiff opposition. The day he made his approach, Euroclear, the Brussels-based clearinghouse that settles Euronext trades, said it wants to merge with Clearstream. Euroclear officials say if the two houses, which together settle 70% of European transactions, were one, they could save investors $180 million a year. "We'd be able to cut costs far more than DB, which is a listed company with investors who demand a good return," says a Euroclear exec. Euroclear is owned by the banks and brokers that use it; they are more interested in cheap transaction fees than profits.
A consortium of 90-odd financial institutions owns the 50% of Clearstream now on the block through a holding company called Cedel. Like Euroclear, these shareholders are interested in lower fees, not profits, and might reject even a sweeter Seifert offer of as much as $1.5 billion. They may be swayed by a Nov. 5 report by the European Shadow Financial Regulatory Committee, a group of 15 financial specialists and academics, which argues that when exchanges control the entire trading apparatus, they have less incentive to cut costs. The European Securities Forum, which represents 27 top banks and securities houses, also opposes DB's move. Indeed, the committee wants the European Commission to bar exchanges from owning clearinghouses.
Officials say the Clearstream board, where Cedel representatives are in the majority, will decide which offer to accept at its next meeting, on Dec. 7. Clearstream customers, however, want a decision by the end of November. A Euroclear win would be a blow to DB. It would own 25% of the merged group, but Seifert's plans to use settlements as a stepping stone to dominating European trading would be dead in the water. Your move, M. Théodore.
By David Fairlamb in Frankfurt