John Lothian recently spoke with Dr. Frank Herkenhoff, Executive Director, Head of Media Relations at Deutsche Boerse AG about five pressing questions in the news about Deutsche Boerse AG’s merger with NYSE Euronext. These are the exclusive responses provided to John Lothian News by Deutsche Boerse on the record about the merger. We have all read the competitor driven stories raising issues in the press; here, Deutsche Boerse responds.
John Lothian: What will the planned merger mean for Europe’s financial markets?
Frank Herkenhoff: The Transaction will provide significant benefits for customers, issuers, and the European economy as a whole. Many of these benefits will accrue to stakeholders directly: the companies expect $3 billion in collateral savings for customers; and direct and substantial reductions in users’ own infrastructure costs. The transaction will increase the number of market participants, improve their access to the companies’ exchanges, and extend the number of available products through the combination of the companies’ complementary products and services. All these will serve to increase liquidity. In addition to lowering users’ implicit costs of trading, this increasing liquidity will lower the cost of raising equity or debt and the cost of risk management for public and private bodies. Finally, greater liquidity will benefit the European economy as a whole by improving stability, safety, and transparency of the capital markets.
John Lothian: Will the merger reduce competition in the derivative’s sector?
Frank Herkenhoff: There is limited head-to-head competition between Eurex and Liffe, and they face strong competition from OTC. Eurex and Liffe compete with each other only to a very limited extent because their instruments are to a large extent complementary. The fact that many traders use both Eurex and Liffe is itself evidence that the products each exchange offers are not substitutes. In fact, the main competition in the derivatives business is not between exchanges but between on-exchange and OTC trading. From a trader’s perspective, on-exchange and OTC derivatives perform the same functions: they are traded either for investment purposes or to manage exposure to various types of risk. Further, proposed mandatory clearing of standardized OTC derivatives will lead to further convergence between OTC and exchange-traded derivatives. Derivatives are a global business. The Eurex/Liffe combination will continue to face strong competition from European and non-European exchanges (including CME, ICE, LSE, NASDAQ OMX), other trading platforms, and OTC. Users of derivatives exchanges are sophisticated players who are flexible enough to switch between exchanges and trading platforms on a global level and to sponsor new trading venues. Technological advances mean that traders, regardless of location, can trade on the world’s derivatives exchanges simultaneously. The main derivatives exchanges are open 22 hours a day to allow traders, regardless of their location, to trade during local business hours.
John Lothian: The vertical integration of your clearing house is continuously criticized by your competitors…
Frank Herkenhoff: Vertical integration between trading and clearing generates significant user benefits. Vertical integration allows maximum innovation in trading and clearing services, by aligning incentives at the trading and clearing level, as well as promoting systemic stability. Vertical integration is efficient as it reduces double marginalization and transaction costs. NYX had already initiated the move to vertical integration, independent of this transaction. The integrated business model has proven to be efficient and secure and has consequently become a role model for the industry over the past years.
John Lothian: Are you trying to keep competition away from your licensing business?
Frank Herkenhoff: There is significant competition in index licensing. The Parties face significant competition in index licensing (e.g. MSCI, S&P, FTSE, Russell, Dow Jones), and operators of derivatives exchanges and CCPs do not require access to the Parties’ indices to compete effectively, including market entry. All indices are calculated and maintained using data which is fully available to the public. The intended merger will not change this situation. The parties’ activities overlap only to a limited extent with their combined share and the increment being negligible.
John Lothian: What are the next steps in the regulatory review process?
Frank Herkenhoff: Given the complexity of financial markets and their topicality, most observers fully expect the EC examination to go to Phase 2 in order to give the EC sufficient time to analyze the transaction, review the evidence it has collected, discuss the transaction with third parties, and address any remaining concerns. Throughout Phases 1 and 2, it can be expected that the parties have been, and will be, actively engaged in discussions with the EC, responding to questions, providing information on their businesses, and explaining to the EC why this transaction is good for competition, users, and ultimately consumers. This expected timeline puts the parties on track for a clearance before year-end.