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Downing Street sees no reason why the planned exchange merger should be reviewed

London is backing Deutsche Börse and the London Stock Exchange Group in resisting German pressure to reopen the exchanges’ planned merger and force the combined company to be based in Frankfurt.

The deal to create a €28bn European heavyweight has been given high level blessing by both the German and UK governments in the past and Downing Street insiders said they saw “no reason” why the deal agreed by shareholders should be reviewed.

Any suggestion that the headquarters be switched from London to Frankfurt because of Brexit would be politically problematic for Theresa May, the UK prime minister, who is attempting to play down the risk to the City of London of life outside the EU.

The regional government of Hessen, which regulates Deutsche Börse, is adamant that it should host the headquarters.

Michael Boddenberg, head of the ruling Christian Democrats in the Hessen regional assembly said it was “sensible” to apply certain conditions. “The central conditions are as follows: the seat of the joint exchange holding company after a possible merger of Deutsche Börse, and the London Stock Exchange must be Frankfurt and the financial base in Frankfurt and the development of Deutsche Börse in international competition must be strengthened through the merger . . . . After the vote of the UK to leave the EU it is in our view ruled out that London can be considered as the [combined company’s] seat.”

This reflects an overall toughening in Germany's view of Brexit in response to signs of Mrs May's government adopting increasingly hard tones. It also ratchets up the tension around the all-share deal to create Europe’s largest exchange group. It also faces tough scrutiny from antitrust officials in Brussels, who this week are expected to formally lay out their principal objections to the merger.

Conceived a year ago, the LSE and Deutsche Börse’s plans to combine to compete with rivals in the US and Asia has been thrown into uncertainty by the UK’s decision to leave the EU.

They plan to base the holding company of the combined group in London, paying UK taxes. Each exchange would maintain local headquarters in Frankfurt and London to oversee regulation of their markets.

The British Treasury said: “We’re not going to comment on this as it’s a commercial issue.” Spokesmen for both the LSE and Deutsche Börse said: “We refer back to our previous statements on this matter — those still stand. The terms of our deal — which are binding — remain unchanged.”

Brussels is conducting an in-depth investigation into the deal and has cited fears that it could reduce competition in derivatives clearing and the repo market, which provides a crucial source of short-term funding for banks. The two exchanges have offered to sell the LSE’s French clearing arm to fend off the concerns.