Not much surprise at this week’s news then, but the rationale for blocking the deal seems odd. Firstly, and whatever they may claim, Brussels did take an overly Eurocentric view. Just call the CME in Chicago and ask where Liffe and Eurex appear on its list of major competitors. Secondly, the Commission claims that LIFFE and EUREX themselves compete but, in fact, they are effectively two ‘mini-monopolies’ operating at opposite ends of the yield curve with almost zero overlap in their products. So it’s not as if the competitive landscape for European derivatives was particularly vibrant anyway. But the biggest issue concerns how the Commission calculated the potential market share for the combined entity. How could they exclude OTC derivatives in their sums when just along the corridor they are also introducing regulation aimed at pushing the OTC and exchange-traded worlds together?
That is not to say that the decision was necessarily wrong, but the reasoning behind it doesn’t seem to stack up. As one of our previous polls showed, the market was pretty evenly divided on the issue but with a significant number of “don’t knows”.
For these swing voters, maybe it’s all about capital efficiency. Ever since the financial crisis, capital has become an increasingly valuable commodity as market regulators around the world are steadily upping the requirements. Would a combined entity have been able to offer more efficient use of capital through margin offsets or otherwise netting positions for traders? Or, would a combined entity have been able to drive up prices and exploit its position without exchanges like the CME or NASDAQ jumping in?
Personally, I think Brussels might end up adding this decision to the “Not sure we got it right” pile.