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Swaps Exchanges Couldn’t Rival NYSE-Deutsche Boerse, EU Ruled

Derivatives exchanges would have been unable to quell the combined market power of Deutsche Boerse AG and NYSE Euronext, European Union regulators said in disclosing their reasons for blocking the duo’s plans to join forces to create a global leader.

Regulators rejected the companies’ arguments that derivatives traded over the counter competed with those traded on exchanges, according to the 447-page filing made public last week. The two products are separate “rather than substitutable” for exchange customers, according to the document, which may set the tone for how the EU’s antitrust agency will view future exchange deals.

“It is unlikely that a timely entry would occur and sufficiently constrain the merged entity in its market behavior,” the EU wrote in the filing posted on its website. As a result, the companies’ “customers would likely face higher fees, less product innovation and would de facto have no choice of trading platform for these products.”

Since the deal was blocked in February, at least five new entrants have announced plans to enter the European derivatives market. Both CME Group Inc., owner of the world’s biggest futures exchange, and Nasdaq OMX plan derivatives markets in London, setting up in competition with Eurex and Liffe, the largest venues. EU lawmakers have also agreed on regulations that will stir competition in derivatives and clearing.


The commission blocked the $9.5 billion deal because it would have led to a near-monopoly in European exchange-traded derivatives. The acquisition of NYSE Euronext would have put more than 90 percent of Europe’s exchange-traded derivatives market and about 30 percent of stock trading in the hands of one company, the regulator said in February.

CME and other derivatives exchanges weren’t likely to “gain meaningful presence in European interest rate futures and options in the absence of a built-up margin pool of correlated European contracts,” the commission said in its filing on the veto decision. “None of these players would be in a position to discipline” a combined Deutsche Boerse and NYSE Euronext, it said.

While the commission’s ruling on how derivatives markets work isn’t binding, its decision sets a precedent that merger lawyers would look at to assess the difficulty of gaining approval for subsequent deals, said Matthew Hall, a Brussels-based lawyer at McGuire Woods LLP.

New Evidence

“If a case looks like it’s potentially difficult, the first thing you do would be to get all the precedents out,” Hall said of lawyers looking at regulatory risk for a possible transaction. A similar deal in the same industry “would be very difficult” without new evidence that sought to convince regulators that the market had changed.

During the year it spent fighting for its deal, NYSE argued that its greatest competitor in derivatives is CME, not Deutsche Boerse. It cited an 89 percent membership overlap between CME and Liffe and rivalry in trading Euribor and Eurodollar futures.

CME last year offered Euribor futures and options on its electronic trading platform, pitting itself directly against Liffe, which dominates the market for co-called short-term interest rate products.

Deutsche Boerse is challenging the veto at an EU court because it “is based on an incorrect and constricted market definition that does not cope with the global character of competition in the derivatives market,” spokesman Frank Herkenhoff said by e-mail.

‘Left Out’

The over-the-counter derivatives segment “as the largest part of the market was completely left out,” he said.

The appeal by Frankfurt-based Deutsche Boerse attacks regulators’ analysis of competition among trading platforms, saying it was “not based on cogent and consistent evidence” and that they failed to properly analyze the role of exchange customers in over-the-counter trading, according to court documents published in June.

NYSE isn’t a party to the appeal and said in March that it was focused on its strategy as a standalone company. Caroline Nico, a spokeswoman for NYSE Euronext, declined to comment on last week’s EU disclosure.

Hall said Deutsche Boerse’s legal challenge may have a sensible rationale if it manages to undermine the EU’s definitions on how derivatives exchanges compete.

The EU court can cancel regulators’ decision or ask them to reexamine the deal if it backs any of the Frankfurt-based exchange’s claims. It was the fourth time the commission had blocked a deal since it overhauled the bloc’s merger rules in 2004.

Appealing a merger decision is an attack on the commission’s legal reasoning and doesn’t say anything about whether companies intend to resurrect a deal.

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