Photographer: Chris Ratcliffe/Bloomberg

Deutsche Boerse Gets EU Objections to $12 Billion LSE Takeover

  • Document reflects ‘narrower scope of issues,’ companies say
  • EU blocked Deutsche Boerse bid for NYSE Euronext in 2012

Deutsche Boerse AG and London Stock Exchange Group Plc say they’ve received formal objections from European Union regulators to their planned tie-up to create the region’s dominant exchange operator.

The so-called statement of objections from the European Union reflects “a narrower scope of issues,” the companies said Wednesday in a statement. EU regulators blocked Deutsche Boerse’s plan to join forces with NYSE Euronext in 2012, citing concerns the combination would enjoy a near-monopoly in derivatives and could shut out rivals to the clearing market.

A statement of objections lists all the EU’s potential reasons to veto a deal. Companies can overcome these arguments with concessions including divestments and pledges about how they do business. While LSE has said it would sell a French clearing unit, the exchange operator hasn’t yet made a formal offer to the EU.

The companies said they “look forward to continuing to constructively engage” with regulators.

Clearing Rationale

Clearing -- a back-office function that acts as a firewall against defaulting traders -- is a key rationale for Deutsche Boerse’s $12 billion takeover of LSE. It has also seen from the start as likely the deal’s biggest hurdle. Putting their clearing operations under one roof would potentially make derivatives trading more efficient -- and could also give the companies a worrisome amount of control over prices.

Clearinghouses stand between traders and collect collateral to prevent a default from spiraling out of control. Their importance is growing: Regulations since the 2008 financial crisis require that an increasing share of derivatives trades are cleared.

The risks stemming from some derivatives positions, whether they are swaps or futures, offset each other. That’s why keeping them together in one pool is seen as more efficient, which could save bank and asset-manager clients money on collateral. LSE and Deutsche Boerse plan to keep their clearinghouses separate while allowing offsetting trades to cancel out, a process known as portfolio margining.

Clearing also makes money. LSE is the majority owner of clearinghouse LCH. In 2015, that unit generated 361 million pounds ($457 million), comprising 25 percent of the company’s overall income.

— With assistance by Will Hadfield

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