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Yesterday, Reuters reported that NYSE Euronext Inc.’s (NYX) proposed $9 billion merger with Frankfurt-based Deutsche Boerse has now decided to dispose of NYSE’s Liffe, its exchange-traded derivative business, in order to shove off the European Union Commission’s (EUC) antitrust concerns over the deal.

Since both the parties agreed to merge in February this year, the EUC began its multi-phase intense review and fears that the merger provides ample scope for a monopolistic model in future, primarily with the fusion of NYSE Liffe and Deutsche Boerse’s Eurex derivative markets. According to the Federation of European Securities Exchanges, Eurex and Liffe have accounted for 97% of European stock futures trading and 93.7% of stock options trading so far in 2011.

In October this year, the EUC also clarified that it would identify exchange-listed derivatives market as the pertinent product market and not the over-the-counter (OTC) derivatives. On the flip side, the merger parties have also made a counter-explanation regarding the EUC concern over the loss of competition in the derivative market from the proposed merger.

Both NYSE and Deutsche Boerse are trying to explain the difference in their mode of operations, related to both the product and geographic scopes that primarily define the law of competition in any industry. The parties-to-merger have also claimed that majority of their derivative markets are traded as part of the OTC market and not through an exchange, thereby leaving ample room for healthy competition in the European markets.

Meanwhile, the German local authorities are closely scrutinizing the merger deal.Earlier this week, this regulator raised some objections over the effect of the combined entity’s future operations in Frankfurt. However, a reply from the exchange operators remains pending.

Hence, NYSE and Deutsche Boerse have now proffered to divest some more of their equity derivatives trading operations, which includes the divestment of NYSE Liffe in their home markets. Additionally, both the parties are also ready to open up Deutsche Boerse’s Eurex Clearing – clearinghouse for derivatives products – to outsiders including its arch rivals for some products. Besides, the parties-to-merger have also agreed upon licensing Eurex trading to third parties, who are interested in initiating interest rate swaps on this platform.

Solid Stock Exchange Ever

The NYSE-Deutsche merger is expected to be the most solid business combination in the history of the global stock exchanges. Based on 2010 net revenues, the prospective merger will earn approximately 37% of total revenue from derivatives trading & clearing, 29% in cash listings, trading & clearing, 20% in settlement & custody and 14% in market data, index & technology services.

Moreover, the prospective merger is expected to generate full run-rate cost synergies of €400 million ($580 million) along with €150 million ($218 million) in revenue synergies.

However, the EUC had already made it very clear in March this year that the deal could undergo a delay on grounds of regulatory impediments arising out of extensive reviewing. As a result of the ongoing extensive probe in Europe, the EUC is now expected to bring out its report card by February 9, 2012, postponing it from the previous deadline, which expired yesterday. Upon the successful outcome of the review, the deal is now projected to be sealed by early next year.

Industry Moves

While a roar of merger and acquisition activities were witnessed in the past three quarters, most of them never saw light due to the regulatory snags, echoing the paramount importance of the regulatory processes. The London Stock Exchange failed to take over Canada’s TMX Group and the Singapore Stock Exchange was also unable to acquire the Australian Stock Exchange owing to opposition from regulatory authorities in both the countries.

Even NASDAQ OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc.’s (ICE) premium-priced joint takeover bid was repeatedly rejected by NYSE on account of multiple antitrust issues.

However, the NYSE-Deutsche merger has been strategically and successfully crossing hurdles in the US, another merger that appears to have survived is the one between BATS Global Markets Inc. and Chi-X Europe. This is soon expected to merge in a deal that will bring in a significant new competitor in European equity trading.

 
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