LSE-Deutsche Börse deal in jeopardy over antitrust hurdle
UK exchange says it cannot meet deadline on new condition to sell Italy-based MTS
The planned €29bn combination between the London Stock Exchange and Deutsche Börse is in jeopardy after the LSE said it would not be able to meet a new condition proposed by antitrust regulators in Brussels.
In a statement late on Sunday, the UK exchange said it would not be able to sell a fixed income trading platform by a sudden deadline imposed by officials to ensure that the main remedy that the exchanges have offered Brussels will work in practice.
The request from EU watchdogs on February 16 was an unexpected demand on the companies, but the LSE said it would not be able to submit a proposal to sell MTS, an Italy-based venue, by midday central European time on Monday.
“Based on the [European] Commission’s current position, LSEG believes that the commission is unlikely to provide clearance for the merger,” the UK company said.
Furthermore, the LSE added that its sale of MTS would damage its relationships with regulators in Italy if it went ahead, and so would not submit a remedy for the unit.
Deutsche Börse declined to comment.
The dispute puts the merger, which has been more than a year in the making, at risk of collapse. The deal to link London and Frankfurt, Europe’s two largest financial hubs, has been criticised by politicians in both countries, particularly after the UK voted to leave the European Union in June last year.
The deal envisaged the holding company being based in London, with Deutsche Börse’s Carsten Kengeter as chief executive of the merged company.
Critics argued that the changing political landscape has altered the deal’s implications for both London and Frankfurt as financial hubs. More recently, Mr Kengeter has also been under scrutiny for share trading before the deal was made public.
The LSE said it remained convinced about the rationale of the deal and that it would continue to implement the merger. However, it added that it was also confident in its standalone prospects.
The LSE has a 60 per cent stake in MTS, with a consortium of 26 shareholders, mainly European investment banks, owning the rest.
So far the companies have only offered to sell the French arm of LCH, a clearing house majority-owned by the LSE that processes equity, fixed income and derivatives.
It has agreed to sell the unit to Euronext, the Paris-based operator, in a €510m deal. The narrow offer highlights that Brussels’ concerns about competition in derivatives clearing, seen as the most likely block to the deal, were receding after intense discussions with the exchanges.
But Brussels regulators are concerned that the disposal of LCH could be compromised if the trading flow from fixed income that is usually sent to the clearing house were diverted to an asset within the combined LSE-Deutsche Börse group, according to three people who have heard their concerns.
MTS trades sovereign and cash bonds and repo markets, a key market for banks for their short-term financing, and competes with Deutsche Börse’s Eurex and BrokerTec, a platform owned by Nex Group.
It is primarily based in Italy, Europe’s largest market for trading electronic sovereign debt, although it has subsidiaries in the UK, France and the US. Average daily volumes usually exceed €100bn.
In 2015, LCH SA cleared €72.6tn across 15 European government markets. Most of the LSE’s fixed-income business is traded through MTS and cleared through either its UK, French or Italian clearing units.
In a questionnaire to market participants this month, Brussels focused on whether competition could be curbed in two areas of clearing; products that are traded privately between two parties, or that are traded electronically but cleared independently in a triparty agreement. In the latter, the clearing house sits between large banks as they swap their collateral from short-term loans.