On Wednesday 29 March, the European Commission confirmed a decision that observers had been anticipating for several weeks, to block the merger between stock exchange operators Deutsche Börse and London Stock Exchange (LSE).
"The European economy depends on well-functioning financial markets. That is not just important for banks and other financial institutions. The whole economy benefits when businesses can raise money on competitive financial markets", the Commissioner in charge of the dossier, Margrethe Vestager, explained at a press conference.
However, this merger, with a price tag of €27 billion, had been a matter of uncertainty for more than a month. At the end of February, LSE publicly stated that it was unable to divest its sales platform for fixed-income instruments (government bonds, bond buyback agreements), MTS. And it was this refusal that prompted the Commission to block the deal.
The Commission's investigation raised three concerns, all related to central counterparty clearinghouses. The merger would have led to a de facto monopoly on the clearing market for fixed-income instruments in Europe, as the parties are the only entities that provide these services. Indeed, all of the following would have been merged: Deutsche Börse's clearinghouse, Eurex, and those of LSE, LCH Clearnet Ltd in London and LCH Clearnet SA in Paris, plus Cassa di Compensazione e Garanzia in Rome. In addition to this concern, the Commission feared that this monopoly would have a spillover effect on the downstream settlement, securities custody and warranties management markets. The service providers present on these markets are dependent on the flows of transactions from clearing houses. Clearstream, the central securities depository of Deutsche Börse, competes with these service providers, meaning that the merged entity could and would have had incentives to redirect these transaction flows to its own benefit.
Finally, the Commission's third concern related to the possible removal of all horizontal competition in the sales and clearing of derivative products on individual shares (based on shares of Belgian, French and Dutch companies).
Vestager explained that for these products, sales and clearing are provided in the form of a bundled product and that Deutsche Börse competes head-to-head with Eurex. Its greatest rival is Euronext, which offers a bundle of its own sales and clearing products competing with LCH Clearnet SA. The latter's market power could have been used to drive Euronext out of the market, she said.
To address the Commission's concerns, the parties proposed to sell LCH Clearnet SA. This would have resolved the problems related to derivative products on individual shares.
However, it would not have fixed the problem of the new entity's monopoly on the clearing market for fixed-income products, as demonstrated by the Commission's consultation of market players. The sale of the platform MTS was one solution, the Commissioner said, but ultimately, LSE has decided not to sell it.
Instead, the parties submitted alternative offers at a very late stage in proceedings (a few minutes before the deadline). This was a fairly complex combination of behavioural measures.
"We have a preference for structural remedies, as they solve things once and for all. Sometimes, behavioural remedies can do the trick, but it's more difficult to see how it will play out in real life", Vestager said. And as the parties proposed these commitments at such a late stage, they should have been clearer, she added, as time was extremely limited to test out these commitments again. Additionally, according to one source, improvements to the commitments were submitted three weeks after deadline.
Deutsche Börse said that it regretted the Commission's decision, describing it in a press release as "a setback for Europe, the Capital Markets Union and the bridge between continental Europe and Great Britain". LSE had not published a reaction by the time EUROPE went to press. (Original version in French by Élodie Lamer)