One of the great things about industrial logic is that it’s easy to slice it up in so many different ways. This appears to be exactly what is happening with the DB1 LSE merger and the rumoured counterbids from ICE and possibly others. Reuniting Liffe (now owned by ICE) with its original clearing house (LCH, now majority owned by LSE) would be powerful, especially when you throw in the OTC open interest that sits at LCH SwapClear. This is, of course, exactly the same logic driving the Germans who wish to do the same combination but using their derivatives exchange, Eurex, instead. A colleague pointed out to me, however, that actually it is the LSE that has the upper hand in all this as it’s easier to fold standardised ETD contracts (such as those at Liffe or Eurex) into SwapClear than vice versa. The OTC market is also far larger than the exchange-traded market and so is the bigger magnet of the two as well.

If this is the case, then whoever loses runs the risk of seeing their entire derivatives business denuded by more efficient offsets operated at SwapClear. And so with the stakes this high maybe neither can afford to lose. ICE has the advantage of size and so could probably offer to pay more, but the Germans are adept at playing the realpolitik of Europe’s regulators. But buying something primarily because you don’t want to see it go to a competitor can lead to emotional decision making and the considerable risk of overpaying. And, of course, we can’t ignore the CME which has long been covetous of the European derivatives market but up to now has shown no interest in running a regular stock exchange.

I have simply no idea yet where this all ends up, but it does make you sometimes wish you were in the M&A advisory business…