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U.S. Clearing Deutsche Boerse-NYSE Takeover Moves Final Approval to Europe

Thursday, December 22, 2011




NYSE Euronext’s (NYX) acquisition by Deutsche Boerse AG was cleared by the U.S. Department of Justice, putting the transaction in the hands of European antitrust authorities who have resisted approval.

U.S. regulators, who in May blocked Nasdaq OMX Group Inc. (NDAQ) from pursuing a hostile bid for the New York Stock Exchange owner, agreed today to allow the purchase by Frankfurt-based Deutsche Boerse as long as the company sells its 31.5 percent stake in another U.S. equity market, Direct Edge Holdings LLC.

Scrutiny of the proposed acquisition has been greater in Europe where the merger would unite the region’s two biggest derivatives exchanges, NYSE’s Liffe and Deutsche Boerse’s Eurex. In the U.S., trading in interest-rate, agricultural and commodity futures is dominated by one company, CME Group Inc., after it merged with the Chicago Board of Trade in 2007 and the New York Mercantile Exchange in 2008.

“It wasn’t the main stumbling block for the NYSE-Deutsche Boerse deal,” Justin Schack, managing director for market structure analysis at New York-based Rosenblatt Securities Inc., said in a phone interview. “I don’t think anyone expected the DOJ to reject this deal. The decision that matters will come from the EU competition commission.”

Declining Value

Deutsche Boerse agreed to acquire NYSE Euronext on Feb. 15, creating the world’s biggest stock exchange operator, for stock worth $9.53 billion. The value of the acquisition has fallen to less than $7 billion as stocks around the world tumbled. Germany’s DAX Index is down 20 percent since the merger discussions were first reported Feb. 9.

The takeover would put more than 90 percent of the European exchange-traded derivatives market and about 30 percent of the region’s stock trading in the hands of one company. Deutsche Boerse’s Eurex is the region’s biggest derivatives exchange, while Liffe is the second-largest. Deutsche Boerse is acquiring the half of Eurex it doesn’t already own. Eurex is owner of New York-based International Securities Exchange, which has a 31.5 percent stake in Direct Edge. Brokers own the rest.

NYSE Euronext and Deutsche Boerse have struggled to convince regulators their combination won’t stifle competition. European Union regulators told NYSE Euronext and Deutsche Boerse yesterday that concessions they offered to allay antitrust concerns in their merger don’t go far enough, two people familiar with the discussions said.

Proposed Remedies

In Europe, the companies have offered capping fees on derivatives trading and clearing for three years, selling NYSE’s Liffe single-stock derivatives business, and the licensing of the Eurex trading system to a third party, said the people, who declined to be named because the talks are private. Regulators haven’t drafted a decision yet, they said.

“The markets that the DOJ is examining in its own jurisdiction, namely in the area of U.S. equities, are different to those where the commission has raised concerns, namely European financial derivatives,” Ryan Heath, a spokesman for the European Commission in Brussels, said today. “We have had regular and constructive dialogue with the DOJ throughout our respective procedures.”

The sale of the stake in Jersey City, New Jersey-based Direct Edge, the fourth-largest stock exchange operator in the U.S., and related restrictions will resolve the U.S. government’s concerns about the merger’s effects on the products and services of equities exchanges, the Justice Department said today in a statement.

Direct Edge

“Without the divestiture and other restrictions obtained by the Justice Department, a combined NYSE and Deutsche Boerse entity could influence the actions of Direct Edge, and thereby lessen the zeal of an aggressive and innovative exchange competitor,” said Sharis A. Pozen, acting assistant attorney general in charge of the department’s antitrust division.

The merging companies are also barred from suggesting or naming any board members of Direct Edge or having any executives work for Direct Edge or any related companies, according to the statement. The companies can’t be involved with private Direct Edge meetings, the department said.

NYSE Euronext and Direct Edge together accounted for almost 37 percent of U.S. equities trading last month, based on data compiled by Barclays Plc and Direct Edge. Total U.S. options volume for NYSE’s two equity derivatives markets and the International Securities Exchange was 43.4 percent, according to data compiled by Chicago-based OCC, which clears the contracts.

‘I’m Surprised’

“I’m surprised there’s a regulatory requirement for a sale given the market shares involved,” Jamie Selway, head of liquidity management at New York-based Investment Technology Group Inc., said in a phone interview. “They said the equities market share was of sufficient size to require divestiture when they didn’t similarly conclude that for options.”

Before deciding whether to approve or block a deal, the European Commission must consult competition agencies from the European Union’s 27 nations. Commissioners from each EU country must also vote on a decision. Companies can then appeal a merger ban at the EU courts.

The European Commission closes for holidays on Dec. 23 and returns on Jan. 2.

Antitrust negotiators in Brussels told Deutsche Boerse and NYSE at a meeting on Dec. 6 that their Nov. 17 offer to divest some European single-equity derivatives units didn’t persuade customers and rivals that the merger would preserve competition, according to people familiar with the discussions.

That meeting followed two days of talks with regulators in October where the exchanges also failed to alleviate antitrust concerns. Regulators have told the companies that their merger would monopolize derivatives trading in the region.

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