NYSE-Deutsche Try to Appease EUC - Analyst Blog

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Yesterday, Reuters reported that NYSE Euronext Inc. ( NYX ) and Frankfurt-based Deutsche Boerse have submitted another proposal to the European Union Commission (EUC), offering to maintain the published clearing and trading fees on the combined entity's European derivatives transactions at the current level over a three-year period, in the event of clearance of the merger.

The move is widely considered to be the final attempt by the exchanges to gain approval for the proposed $9 billion merger of NYSE and Deutsche Boerse, an nounced in February this year. While a final decision from the EUC is expected by February 9, 2012, there are a handful of anti-trust concerns that need to be remedied.

The anti-trust authorities are apprehensive as the deal will put about 90% of the European exchange-traded derivatives' market and 30% of the stock trading transactions under the umbrella of the merged company. The EUC is worried that the huge market share and the amalgamation of trading and clearing functions in the merged company might put rivals at a competitivedisadvantage and also push out new entrants .

However, NYSE and Deutsche Boerse are trying to convince the authorities that a majority of their derivatives are traded as over-the-counter products and not through any exchange, thereby leaving substantial scope for competitors. Additionally, the exchanges have been offering various concessions to address the concerns of the authorities.

Last week, NYSE and Deutsche Boerse had offered to divest the single-stock equity derivatives business of NYSE's Liffe in Brussels, Paris, Lisbon, Amsterdam and London. Additionally, the exchanges agreed to provide access to Deutsche Boerse's Eurex Clearing to outsiders, including rivals, for some products.

The parties to the merger also agreed upon licensing Eurex trading to third parties, who are interested in initiating interest rate swaps on this platform.

However, the fate of the merger lies in the hands of the anti-trust authorities and failure to convince them will likely kill the deal. The agreement was announced at a time when eroding market shares had led to a series of attempts by various exchanges to make cross-border deals in the hope of diversification and cost reduction.

In fact, NYSE itself had faced a counter-bid from arch rivals NASDAQ OMX Group Inc. ( NDAQ ) and its commodities partner IntercontinentalExchange Inc . ( ICE ) in April this year but the U.S. Department of Justice had rejected it over anti-trust concerns. Another rival, London Stock Exchange Group Plc. had attempted a tie-up with Canada's TMX Group Inc. but nationalistic concerns had forced them to abandon the deal.

All other deals were also either unable to gather enough investor support or faced regulatory and political hurdles and collapsed. The NYSE - Deutsche Boerse deal has been one of thefew to have gone this far, along with the proposed merger between BATS Global Markets Inc. and Chi-X Europe.

Currently, NYSE carries a Zacks #3 Rank, which translates into a short term Hold rating.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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