To Merge Their Farms, Will Deutsche Borse and NYSE Have to Sell the Silo?

 |  Includes: DBOEY, NYX
by: Craig Pirrong

Immediately following the announcement of the proposed NYSE-Euronext (NYSE:NYX) / Deutsche Boerse (OTCPK:DBOEY) deal, I stated that the main risk to the transaction would be European antitrust regulators who are not keen, to say the least, on the vertical integration of exchanges and clearinghouses (the “silo” model).

A close watcher of these developments, Anthony Belchambers of the Futures and Options Association, believes this risk is quite real:

European regulators could push merger partners NYSE Euronext and Deutsche Boerse AG to spin off part of their derivatives clearing business, according to a senior industry lobbyist.

Fusing NYSE Euronext’s London-based Liffe unit with the German company’s Eurex business would create a dominant force in European-listed derivatives, and antitrust officials may target the profitable clearing segment as part of any approval, said Anthony Belchambers, chief executive of the Futures and Options Association, which represents banks and brokers in the region.

“Clearly they’re going to be looking very closely at this,” Belchambers said of the regulators’ stance. He was speaking in an interview on the sidelines of an industry conference organized by the Futures Industry Association, the FOA’s U.S. counterpart.

Deutsche Boerse has in the past successfully fought efforts by some European lawmakers to force the separation of its clearing business, and analysts said a renewed push could effectively sink the planned NYSE Euronext deal.

Belchambers said regulators are likely to focus on exchanges’ control of clearing trades in futures and options contracts listed on their markets, a framework that has enabled market operators like Eurex and Liffe to fend off competitors in fixed-income and stock-index contracts.

This would be a deal killer, most likely; the main attraction of the deal is the potential to exploit clearing efficiencies and profits, and DB considers integrated clearing an essential part of its business model. I would think that DB would rather stand pat with its current business than merge and amputate its clearing operations.

Given that, will European regulators push it and impose conditions that make the deal unpalatable, especially for DB? And if they do, will that leave the door open for Nasdaq (perhaps in conjunction with ICE)? Absent a deal killer, or the serious prospect of a deal killer, I don’t see Nasdaq or Nasdaq + ICE as a serious threat to break up the proposed merger, especially since Nasdaq + NYSE would pose antitrust issues here in the U.S.