4th UPDATE: Deutsche Boerse, NYSE Confirm Merger Talks

Deustche Boerse AG (DB1.XE) and NYSE Euronext (NYX) on Wednesday confirmed that they were in advanced merger talks, reviving a plan that would create the world's largest financial exchange if it manages to pass scrutiny from regulators.

The proposed all-stock deal comes two years after the companies ended exploratory talks and in response to new trading platforms run by banks and third parties that have been taking share from established exchanges across a range of asset classes.

A deal is driven in part from the opportunities in the derivatives market, particularly as an evolving regulatory landscape drives more over-the-counter business on to exchanges.

The enlarged company would have a dominant role in the European derivatives market and provide a new beachhead for NYSE's efforts in the U.S. futures and options sector.

The combination would effectively be a takeover by Deutsche Boerse, whose shareholders would hold around 60% of a new entity, and end the long search by Chairman Reto Francioni for a transformative deal.

Francioni would become chairman while NYSE Euronext chief executive Duncan Niederauer would retain his role under a board drawn equally from both companies, with the new entity led jointly from the new Deutsche Boerse headquarters near Frankfurt and New York, and incorporated in the Netherlands.

The global derivatives business would be led from Frankfurt, with Paris hosting the technology arm and European cash trading, with the global listings operation and U.S. cash trading run from New York, according to people familiar with the situation.

A deal could be announced as early as next week, according to people familiar with the situation, though a host of regulatory challenges await on both sides of the Atlantic, according to competition experts.

Two previous attempts by Deutsche Boerse to merge with NYSE--in 2008 and in 2009--fell through, in part because of internal management disputes at Deutsche Boerse and disagreements about where a merged company would be headquartered. These came after NYSE beat out off a rival bid from its German partner for Paris-based Euronext in 2006.

But the rise of dark pools and other alternative trading platforms has eroded exchange margins, forcing them to seek other revenue streams as technology providers and to re-examine industry consolidation.

The announcement came just hours after the London Stock Exchange Group plc (LSE.LN) and Toronto-based TMX Group (X.T) agreed on a "merger of equals" that would create a transatlantic group heavy in resource and clean-energy listings, while bolstering trading technology partnerships.

Last October, Singapore Exchange Ltd. (S68.SG) announced an $8.3 billion offer for all the shares of ASX, the operator of the Australian Securities Exchange.

Deutsche Boerse and NYSE Euronext said a combination could generate $300 million in annualized synergies, some 10% of their cost base, with potential revenue gains to come from clearing and cross-selling products.

The as-yet-unnamed entity would extend NYSE's lead as the largest share-trading venue in the world, adding the Frankfurt Stock Exchange to NYSE's stable of four European bourses, as well as the Big Board in the U.S.

It would also supplant CME Group Inc. (CME) as the world's largest futures exchange by contract volume and create a clear leader in the U.S. options market.

Linking Deutsche Boerse's bund futures with the gilt futures offered on NYSE Euronext's U.K.-based Liffe market would give the combined exchange vast sway over heavily traded interest-rate futures contracts in the region, creating a formidable competitor to CME. The Eurex derivative unit of Deutsche Borse tried and failed to break CME's monopoly on its own seven years ago.

It would also bolster positioning in U.S. stock-options trade. NYSE Euronext's two options platforms, combined with Deutsche Boerse's International Securities Exchange market, amounted to about 40.5% of the U.S. options market last month.

Traders will be watching to make sure a combined entity does not use its influence to drive up fees, said Joseph Cangemi, chairman of the Security Traders Association. "With this all happening around us and the small disappearing, the big cannot take advantage of their size and we need to monitor that," he said.

Now they have two giant distribution networks on both sides of the Atlantic and those access points are robust, big and deep," he said.

The deal also turned attention to Europe, where two major electronic operators, BATS Global Markets and Chi-X Europe, are in discussions on their own possible combination.

"You kind of have to rethink what this does in terms of the pan-European platforms. The European side is going to become much more consolidated as a result of this proposal. You can also look at this vis-a-vis the fact that Bats and Chi-X Europe are in exclusive talks, and how will the synergies that will be ringed out of the NYSE/Deutsche Borse merger help them compete with the potential combination of BATS/Chi-X Europe," Cangemi said.

Deutsche Borse shares were recently up 1.7% at 58.42 euros ($79.64) and NYSE Euronext was 14.6% higher at $38.27.

CME shares were up 1.4% at $305.18, with Nasdaq OMX Group Inc. (NDAQ) leading the risers in the buoyant exchange market, up 7.2% at $27.71.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;

jacob.bunge@dowjones.com

--Doug Cameron, Kristina Peterson, Donna Kardos Yesalavich and Brendan Conway contributed to this article.

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