Closed For Stock-Taking: The European Commission's Prohibition Decision In Deutsche Börse/ NYSE Euronext

Author:Mr John Kettle, Anthony Burke and Niall Collins
Profession:Mason Hayes & Curran

On 1 February, the European Commission ("Commission") announced that it had decided to prohibit the proposed merger between Deutsche Börse ("DB") and NYSE Euronext ("NYSE"). Commission merger prohibition decisions are particularly rare. There have been a total of 21 prohibition decisions since the EU Merger Regulation first entered into force on 21 September 1990. The two most recent prohibition decisions concerned the proposed Ryanair/Aer Lingus and Olympic/Aegean mergers. However, as the statistic indicates, the risk of outright prohibition should be seen as extremely marginal when weighed against the total number of cases (in excess of 4,500) reviewed by the Commission. Relevant market and the position of the parties DB and NYSE operate the two largest exchanges for European financial derivatives in the world: Eurex and LIFFE. The Commission opined that the proposed merger would have resulted in a quasi-monopoly in European financial derivatives, where, in the Commission's view, DB and NYSE together control more than 90 per cent of the global market. Derivatives are financial contracts traded on financial markets used to transfer risk and whose value is derived from an underlying variable or asset, such as stocks, interest rates or currencies. They are typically used for investment purposes, hedging and overall risk management in the financial markets. They can be traded on exchanges or over-the-counter ("OTC"). The Commission's market investigation assessed the extent to which customers of European financial derivatives switch between exchange-traded and OTC derivatives. The evidence collated by the Commission, including the parties' own documents, showed that exchange traded and OTC derivatives had different characteristics and fulfilled different customer demands. Exchange traded derivatives are highly liquid, are traded in relatively small sizes (approximately €100,000 per trade) and use fully-standardised contracts. OTC derivatives typically concern much bigger transactions (approximately €200 million per trade) that allow full customisation of their legal and economic terms and conditions, tailored to the customer's requirements. When a contract is available on exchange, derivatives users generally prefer this execution as it is much cheaper than OTC. The Commission also pointed to a White Paper published by DB in 2008, which suggested that trading the same contract OTC is up to eight times more expensive. In the Commission's view, this is...

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