The European Commission has formally prohibited the proposed merger between Deutsche Börse AG and London Stock Exchange Group (LSE), citing EU merger regulatory actions, dealing a huge blow to the prospects of the deal moving forward after months of speculation.
The merger between Deutsche Börse and the LSE was on hold last week after the European Commission was allegedly in the process of exercising its veto power to block the deal. Today’s action by the European Commission follows a lengthy investigation that concluded that the deal would have resulted in a monopoly across markets in the clearing fixed income space. The final result comes as Theresa May’s triggering of Article 50 puts the UK on a path towards Brexit today.
One of the saddest days in the last 200 years of British political history; one of the greatest acts of self-harm. Heartbreaking. pic.twitter.com/GxUk1qnvUm
— Alain de Botton (@alaindebotton) March 28, 2017
Despite lingering issues, the proposed merger would have resulted in the aggregated activities of the two largest European stock exchange operators, Deutsche Börse and the LSE. The deal had drawn ire from many officials and rival exchanges, which collectively warned the deal would undermine any feasible competition given the utter scale of the newly combined entity.
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Concessions not enough
The latest turn comes just one month after both groups seemingly barrelled ahead despite widespread resistance from European exchanges and regulators. In a power move and sign of confidence that the merger would not be obstructed, both Deutsche Börse and LSE ceded little ground even in light of antitrust concerns.
Previously EU regulators as well as a number of European exchanges voiced their concerns over the magnitude and scale of a Deutsche Börse and LSE merger. In a bid to placate these worries, the groups extended a rather small offer, which included the sale of the LSEG’s French clearing arm. These attempts proved too little as concerns over a monopoly of fixed income instruments were too much to overcome.
With regard to this concessions, the Commission conducted a market test and ruled that this divestment would have resolved some concerns relating to single stock equity derivatives, however it would not have been effective in allaying the concerns stemming from the creation of the de facto monopoly in fixed income clearing.
De facto monopoly
Consequently, the resulting entity would have been too big of a force in clearing fixed income instruments, triggering a market-wide effect on other players, dictating all matters of settlement, custody and collateral management. Moreover, the Commission felt that the merged entity could have had the ability, as well as the incentive, to divert transaction feeds to Clearstream and foreclose all other competitors.
The merger would also have combined Deutsche Börse’s Frankfurt-based clearing house Eurex with LSE’s clearing houses LCH.Clearnet and Rome based Cassa di Compensazione e Garanzia.
According to Commissioner Margrethe Vestager, who was tasked with the competition of the recent verdict: “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.”