Vice President of the European Commission responsible for Competition Policy
Mergers: Commission blocks proposed merger between Deutsche Börse and NYSE Euronext
Brussels, 1st February 2012
We have decided today to prohibit the proposed merger between Deutsche Börse and NYSE Euronext.
Deutsche Börse and NYSE Euronext operate the two largest exchanges for European financial derivatives in the world: Eurex and Liffe. The two companies are by far the largest global players in these products.
If allowed, the merger would have resulted in a quasi-monopoly in exchange traded financial derivatives based on European underlyings, where the two companies control more than 90% of the global market.
In accordance with the European merger control rules, the prohibition aims to protect the European economy from the perverse effects of a combination that would have practically eliminated effective competition in the market, with significant harm to customers.
The merger would have led to the worsening of conditions for companies trying to access financial instruments and would have harmed the European economy as a whole.
Let me explain to you why we have reached such a conclusion.
We found ample evidence in our investigation that Eurex-DB and Liffe-NYSE Euronext compete head-to-head and are each other's closest competitors. These two companies constrain each other's prices and compete in product and technology innovation. Therefore, the merger would have eliminated a healthy process of competition.
Given the essential role derivatives play in the European economy, we could not allow this to happen.
We saw no problem in the more traditional part of the exchanges' business, namely the listing and trading of shares on the stock market. However, for derivatives on European interest rates, European single equities and European equity indices, we found serious competition concerns. Our investigation focused on these products.
In order to determine the relevant market for the merger, we looked at how customers regarded different types of derivatives, and concluded that different products responded to different customer needs. The relevant market depends in particular on the underlying asset on which the derivative is based. Derivatives based on Euro zone interest rates are not substitutes for derivatives based on US interest rates. By the same token, derivatives based on a European equity index are not substitutes for derivatives based on a US equity index and so on.
The relevant market also depends on the level of standardisation of the derivatives. While exchange traded derivatives are highly liquid and fully standardised contracts, traded in relatively small sizes (around €100 000 per trade), over the counter derivatives typically concern much bigger transactions (around €200 million per trade) and can be tailored to the customer's needs.
Our investigation showed that exchange traded derivatives and over the counter derivatives are simply different products. Customers use them for different purposes and in different circumstances. They are not substitutes. For example, some entities that trade on exchanges do not have a mandate to buy derivatives over the counter. This is because OTC derivatives are much more risky than derivatives traded on exchange and require sophisticated risk management procedures.
As our investigation also showed, the two companies proposing to merge do not themselves view OTC products as a competitive threat for the types of derivatives they trade. On the contrary, we found evidence that they regard only each other as true competitors.
Our conclusion holds whether the geographic market is considered as European or global. The Chicago Mercantile Exchange (CME), in particular, is a potential competitor in the products concerned but its presence in derivatives based on European equities is zero and in European interest rates is minimal. Due to the "closed vertical silo" operated by Liffe and Eurex, where the exchange's trading is exclusively linked to a clearing house, there are major barriers to entry in these markets. Customers prefer to stay on exchanges where they can pool margin and thereby save collateral.
As a result there is simply no prospect for CME or any other new player to exercise a meaningful competitive constraint on the two companies in the products concerned in the foreseeable future.
There is also no indication that the merger would provide significant benefits to customers due to possible efficiencies, especially in terms of liquidity. It has not been demonstrated nor have we found evidence that exchange consolidation increases liquidity to a significant degree.
What we have witnessed in the past is rather the opposite: the opening of markets and an increase in competition has improved liquidity. Competition, such as that introduced in cash markets through the MIFID legislation, has also been associated with a drastic decrease in the cost of trading services.
Our analysis also indicated that any benefits of the merger stemming from collateral savings would also be limited.
Efficiencies were overall not enough to compensate the harm created by the merger. The operation would thus have created a near monopoly for exchange-traded derivatives based on European interest rates or equities, with negative consequences for the market.
Therefore, we could only have allowed the merger if Deutsche Börse and NYSE Euronext had offered sufficient remedies to remove these anti-competitive effects.
Unfortunately, the parties only offered remedies which were very limited in scope. They did not propose to divest sufficient assets so as to create an independent and significant competitor. Neither did they propose full access to their clearing facilities to existing or potential competitors.
The anti-competitive effects were very significant and the offered concessions limited. In the end, we had no alternative but to prohibit the merger.
Financial exchanges are the lifeblood of the European economy. I am convinced that in order to serve the real economy well, financial markets must be open, efficient and competitive. Our important ongoing work in financial regulation fully supports this approach.
Whatever the regulatory framework, entrenching a monopoly that would likely lead to higher prices and lower innovation is not in the European interest. With today's decision, we have ensured that competition, access and efficiency will be maintained in these vital markets in the future.