EU to probe massive stock exchange merger

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The EU will soon examine a merger bid between two of the world's largest stock exchanges which US lawmakers fear would shift global financial prowess from New York to Frankfurt. 

Deutsche Börse and NYSE Euronext have admitted that they are in advanced talks to merge their operations, a move which would create the world's largest owner of equities and derivatives markets and secure a bigger slice of a booming derivatives market.

Before a meeting with the EU Competition Commissioner Joaquin Almunia yesterday (22 February), Dominique Cerutti, deputy chief executive of NYSE Euronext, said he was confident the merger would be cleared by the European Commission by the end of 2011.

The deal would see Deutsche Börse get a 60% majority stake in the company, leading some to believe that the merger would spell the end of Wall Street's dominance of global markets.

Cerutti told journalists ahead of his meeting with Almunia yesterday that the size of the new company's derivatives business and its clearing operations, like the technology and methodology used, would face the greatest scrutiny from EU regulators.

He also seemed confident that the deal would get merger approval quickly from the US Securities and Exchange Commission. The European Commission recently extended its own deadline for merger approval, buying itself more time to examine the deal.

NYSE brand 'in peril'

The deal has created some controversy among US lawmakers who fear the merger could damage the NYSE brand.

"The New York Stock Exchange is a symbol of national prestige, and its brand must not suffer under this merger," said American Senator Charles Schumer, insisting the two sides must agree on a name for the new company that does not damage the American exchange.

The exchanges are trying to cash in on a global regulatory push to get Over The Counter (OTC) derivatives onto exchanges.

Cerutti lambasted the lack of transparency in global markets and diagnosed derivatives markets as 90% opaque and equities as pushing 50% opacity.

The EU's European Market Infrastructure Regulation, which was proposed in September 2010, aims to increase stability within OTC derivative markets currently valued at $600 trillion.

"All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest," reads the draft regulation.

Market commentators note that the deal will prop up NYSE's business which has been losing out to cheaper electronic trading platforms called Multilateral Trading Facilities (MTFs).

On 9 February 2011, Bloomberg reported that the Deutsche Börse was in advanced talks to buy NYSE Euronext. The news led both companies to freeze their shares for fear of large price movements before the deal had been signed.

The deal would see the new company become the world's largest stock exchange operator, with listed companies equal to US$15 trillion.

Derivatives have come under regulatory fire since the onset of the financial crisis. The advantage of derivatives is that they allow companies and governments to increase their means of managing risk. The disadvantage is that they are the top instrument for speculative operations and if used irresponsibly, they can increase risk at exponential levels.

Establishing central clearing houses is considered as a moderate way of reducing systemic risk related to derivatives. Instead of being exchanged privately ('over the counter'), they could be processed through an intermediary, a move which is expected to improve transparency and reduce risk. The European Commission clearly supported this approach in a communication published in July 2009 (EURACTIV 06/07/09).

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