Deutsche Boerse Director Says ‘Creative’ Answer Needed for LSE

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  • Merged company would be ‘stability factor,’ von Schmettow says
  • Bloomberg survey shows odds of deal happening at just 26%

A senior Deutsche Boerse AG official says the company and its takeover target London Stock Exchange Group Plc need to find a “creative” solution to square mounting opposition to the potentially merged firm’s London headquarters.

“They will need to be creative when it comes to the issue of the location of the holding company,” said Carola von Schmettow, chairwoman of the Exchange Council of Deutsche Boerse’s Eurex Deutschland derivatives exchange. She is also the Germany head of HSBC Holdings Plc, which is advising Deutsche Boerse on the LSE takeover. “It would be worse to put the whole merger on ice.”

After Britain’s referendum to leave the European Union, support for the deal in Germany has been dwindling. A key issue is the plan to place the combined holding company in London, a particularly controversial choice following the vote. A Bloomberg survey of analysts and fund managers estimate that the odds of Deutsche Boerse successfully taking over LSE are just 26 percent.

The deal “continues to makes sense,” Von Schmettow said in an interview in Frankfurt on Thursday. “It would act as a stability factor, as a bridge between the U.K. and Europe. It would be a positive signal for both financial centers if this merger goes through. Europe has a major opportunity to make its mark.”

LSE shareholders are set to vote on Deutsche Boerse’s offer on July 4 as its shares recover from a 16 percent decline in the two days after the June 23 referendum. The stock slipped 0.5 percent to 2,519 pence at 8:47 a.m. in London, while Deutsche Boerse dropped 1.8 percent to 72.21 euros in Frankfurt.

The merger creates an opportunity for Frankfurt as a financial center, boosting the potential to increase clearing volumes, von Schmettow said.

“For a clearing bank like HSBC, it’s vitally important to have access to the kind of clearing infrastructure that Deutsche Boerse has,” she said. “The risk-management tools that they offer are very important. The topic of clearing has been underestimated up to now.”

Gaining Scale

Gaining scale in clearing by linking Eurex and LSE’s LCH.Clearnet is the bedrock of Deutsche Boerse Chief Executive Officer Carsten Kengeter’s rationale for the deal. Clearinghouses act as the middlemen in trades, as a buyer to each seller and vice versa, making good on the transactions that fail if one party defaults.

Changing the holding company headquarters to Frankfurt, or even a more neutral location like the Netherlands, could be a non-starter for LSE. LSE chief Xavier Rolet has long said that it’s vital for London to keep its central role in financial infrastructure, which includes operations like exchange trading and clearing. Rolet has said that he agreed to step down from his role to secure London’s place in the deal.

The transaction has other hurdles. Kengeter and Rolet are facing growing political fallout over London’s central role in clearing euro derivatives. The European Central Bank has sought that role for the euro area in the past, and there’s every indication that politicians are ready to revive the fight. French President Francois Hollande this week took direct aim at those operations and said they must move to an EU jurisdiction.

The companies also have to contend with share price valuations that have been whipsawed since the Brexit vote.

“Waiting and delaying this deal isn’t a good idea,” Von Schmettow said, adding that the risk of yet more share trading gravitating from Frankfurt to London will increase without a merger. “London is the center for professionals, there’s no getting around that.”