by Prajakt Samant

The European Commission (EC) has blocked the proposed merger between Deutsche Börse and NYSE Euronext.  The decision follows the EC’s announcement that such a merger could cause a ‘near-monopoly’ in the European financial derivatives markets, by creating the world’s largest equity and derivatives exchange operator.   

The merger would have seen the uniting of Eurex (of Deutsche Börse) and Liffe (of NYSE Euronext), and would have resulted in the merged entity controlling more than 90 percent of European exchanged-traded derivatives.  Michel Barnier, the European Commissioner for Internal Market and Services, was in favour of the merger, arguing that it would create a European champion in the global financial market.

In taking its decision, the EC had to establish what the relevant market was.  The parties argued that the relevant market included exchange traded derivatives, as well as over-the-counter (OTC) and off-exchange traded derivatives.  By seeking to widen the scope of the market, the parties hoped to demonstrate that the proposed merger would not occupy a dominant position in the market and would therefore not be deemed to be anti-competitive.

However, the EC found that the relevant market included exchange-traded derivatives only, with OTC and off-exchange derivatives forming a separate market, as the products had different characteristics and fulfilled different customer demands.  This conclusion was reached on the following grounds:

• Exchange-traded derivatives are fully standardised liquid products whereas OTC derivatives allow for the customisation of their legal and economic terms and conditions.
• Exchange-traded derivatives are usually traded in small sizes (around EUR 100,000 per trade) whilst the average trade size for OTC derivatives is much larger (around EUR 200,000 per trade).
• By definition, OTC trades cannot be undertaken on exchange.
• Certain customers will only trade on exchange as they either cannot, or will not, trade OTC.  This could be for risk management reasons, or not having the required mandatory or operational set-up to trade OTC.

The EC’s decision does not follow the decision that was taken by several other regulators.  Approval for the merger had been granted in Germany, Luxembourg and in the U.S. by the Committee on Foreign Investment in the United States, the Department of Justice and the Securities and Exchange Commission. 

It is not yet known whether the EC’s decision will be subject to appeal, although such an appeal, if pursued, could last several years.  The remedies offered by the two parties, including the sale of Liffe’s European single stock equity derivatives products where these compete with Eurex, were deemed to be insufficient by the EC, particularly as they did not extend to existing competing products.