EC blocks Deutsche Börse and LSE merger

The European Commission (EC) has prohibited the proposed merger between Deutsche Börse and London Stock Exchange (LSE) under the EU Merger Regulation.

EC commissioner Margrethe Vestager, in charge of competition policy, says the merger “would have significantly reduced competition by creating a de facto monopoly in the crucial area of clearing of fixed income instruments” and as the parties “failed to offer the remedies required to address our competition concerns, the Commission has decided to prohibit the merger”.

This story was originally published on 27 February 2017 with the headline “Doubts over Deutsche Börse and LSE merger”:

The merger between Deutsche Börse and LSE has been put into doubt by the European Commission’s Phase II proceedings.

As Banking Technology reported last year, Deutsche Börse and LSE had reached agreement on the terms of an all-share merger of “equals”.

However, an update on the European Commission Phase II proceedings in connection with the merger, “unexpectedly raised new concerns about the viability”.

As background to the story, on 7 February, the Commission began a period of market testing based on LSE’s and Deutsche Börse’s submitted commitments, comprising of the proposed sale of clearing and central counterparty (CCP) services provider LCH.Clearnet to pan-European exchange Euronext. This concerns “the LCH SA remedy in relation to access to bond and repo trading feeds currently provided by MTS”. The latter being fixed income trading venue MTS.

The Commission required that the parties commit to the divestment of LSE’s majority stake in MTS to “secure merger clearance”, which LSE sees as “disproportionate” as it “tested thoroughly the feasibility and implications of this remedy”.

Following further detailed discussions, the Commission requested that the parties formally submit a remedy proposal for the divestment of LSE’s majority stake in MTS by 12pm (CET) today (27 February).

The LSE didn’t do this and has a lengthy explanation.

LSE says although MTS is not on its own a major contributor to LSE revenues, LSE’s Italian businesses represent a “significant proportion” of LSE revenues and profitability. Any change of control of MTS would require, in particular, the approval of the Italian authorities and would trigger parallel regulatory approval processes in other jurisdictions including the UK, Belgium, France and the US, according to LSE.

Following dialogue with Italian authorities about the Commission’s required remedy and given prior discussions between the principals and Italian authorities regarding LSE’s Italian businesses in the context of the merger, the LSE board believes that it is “highly unlikely” that a sale of MTS “could be satisfactorily achieved”, even if LSE were to give the commitment.

The LSE board also says the offer of such a remedy would jeopardise its relationships with these regulators and be detrimental to LSE’s ongoing businesses in Italy and the combined group, were the merger to complete.

Therefore, as stated above, the LSE board says it “could not commit to the divestment of MTS” and will not be submitting a remedy proposal with respect to MTS. Based on the Commission’s current position, LSE believes the Commission is unlikely to provide clearance for the merger.

The plans for the merger are not over, as LSE says it will continue to try and make it happen.