The European Commission (Commission) has taken the unusual step of blocking the proposed merger between Deutsche Börse and London Stock Exchange Group (LSE). Following an investigation into the proposed merger, the Commission found that it would create an effective monopoly “in the crucial area of clearing of fixed income instruments“. The parties’ proposed remedies to alleviate these concerns were held to be ineffective, and consequently the merger has been prohibited.
In March 2016, LSE and Deutsche Börse announced that they had agreed terms to enter into a £21 billion “merger of equals”. The merger would have combined the operations of the two largest European stock exchanges (in London and Frankfurt), along with the Italian stock exchange, Borsa Italia, which is owned by LSE. It would have also combined four clearing houses, in Frankfurt, London, Milan and Paris.
In September 2016, the Commission announced that, as a result of competition concerns raised during its Phase I investigation into the proposed merger, it would launch an in-depth Phase II investigation to examine its preliminary concerns in more depth.
Phase II Decision
On 29 March 2017, the Commission announced that it had completed its Phase II investigation and as a result would prohibit the proposed merger.
During the Phase II inquiry, the parties were asked to put forward undertakings to remedy the Commission’s concerns that competition in various markets, including clearing, derivatives, repurchasing agreements, German stocks, and exchange traded products, would be heavily affected.
In response to the concerns raised, the parties proposed to divest LCH.Clearnet SA, LSE’s French clearing house. While the Commission noted this would assist with concerns regarding single stock equity derivatives, the parties would still have had an effective monopoly on clearing of fixed income instruments (for example, bonds and repurchase agreements). This was because in terms of its fixed income clearing business, LCH.Clearnet SA was vitally dependent on trading feeds from LSEs own fixed income trading platform. As a result, it was unclear whether LCH.Clearnet SA would have been able to operate as a viable, standalone business in this area, and therefore offer the necessary competition to LSE and Deutsche Börse’s other fixed income clearing operations.
The Commission noted that had the parties offered to divest LSE’s fixed income trading platform (MTS), then this would have resulted in a relatively simple remedy. LSE would not countenance such a proposal, instead offering a “complex set of behavioural measures“. In the Commission’s view, the parties had failed to demonstrate that these measures “would have been effective in practice“, and therefore found that there was no adequate remedy put forward to the de facto monopoly on fixed income instrument clearing. As a result, the Commission concluded that it had no option but to prohibit the merger.
Osborne Clarke Comment
Announcing this decision, European Competition Commissioner Margrethe Vestager stated that “the European economy depends on well-functioning financial markets“. This decision highlights that competition law enforcement and merger control will continue to be a key weapon in the EU’s armoury to ensure the correct functioning of financial markets.
Blocking a merger entirely is an unusual step, and one which goes to show that the Commission is not afraid to take a hard line against parties it feels do not go far enough in ensuring that a merger will not result in a harmful reduction in competition.