European Commission’s decision to ban the Deutsche Börse – London Stock Exchange merger, on the one hand solved a long list of problems it could have triggered, in view of and after the Brexit. On the other hand though, this decision has created probably as many issues, because London is the long established low cost and competitive capital market hub, catering for the entire European Union.
Even Wolfgang Schäuble, the stubborn German minister for Finance has recognized that the financial sector Brexit has to be very cautious and gradual. The reason is that mainland Europe is not ready, at least not yet, to offer the same quality and low cost capital and derivatives markets opportunities or clearing and settlement services as London, even for the euro denominated transactions.
Some big global financial groups located in London have started ‘advertising’ relocation of personnel to mainland Europe. However, this is kind of blackmailing the British government to meticulously serve their ‘cause’ during the Brexit negotiations. The real prospects of transferring the bulk of their activities to the Continent are currently nonexistent. Their ‘passport’ to do business in the Continent is not actually at stake, at least in the foreseeable future. Marketplaces of the size and the shine of London are developing very slowly and gradually, and Paris or Frankfurt need a lot of time, deep structural changes and different mentality, in order to try imitating City’s success story. Until that day comes, if ever, the City will continue servicing the Continent as it does for some decades now. Let’s return to Brussels and look deeper into the LSE– Deutsche Börse blocked merger.
Last Wednesday, Margrethe Vestager, the European competition Commissioner, delivered a Press conference in Brussels to announce the decision of the EU’s anti-trust watchdog, forbidding the €30 billion marriage of the two largest stock exchanges of Europe. Understandably, the main reason for the banning is that in a number of key markets, like fixed income instruments and derivatives clearing, this merger would have created a ‘de facto’ monopoly. Possibly though, the European Commission had some other, ulterior motives in forbidding this gigantic merger, which in the distant future could even neutralize some aspects of the Brexit itself.
Barring a monopoly
In any case, the key factor for the banning was the fixed income instruments clearing (bonds and repurchase agreements), a business in the region of trillions. The Commission’s announcement turning down the merger didn’t mention the Brexit not even once. Instead, Vestager focused on her duty to safeguard fair competition and low cost services to the financial community of the entire Europe.
The relevant Commission Press release says plainly that “… the merger would have combined Deutsche Boerse AG’s Frankfurt based clearing house Eurex with LSEG’s clearing houses LCH. Clearnet (which comprises London based LCH Clearnet Ltd and Paris based LCH Clearnet SA) and Rome based Cassa di Compensazione e Garanzia. This monopoly in clearing fixed income instruments would also have had a knock-on effect on the downstream markets for settlement, custody and collateral management”. Some weeks ago, the Commission had asked the LSE to put up its Italian affiliate (CCG) for sale and let go of it, in order to allow the merger. In that way, fair competition would have been safeguarded. However, the LSE directors rejected the Commission’s condition. So, Vestager was obliged to forbid it.
The LSE works for the EU
But why did the LSE directors deny letting go their Italian affiliate? This is a firm which offers clearing services to practically all transactions on the Italian government paper. It’s a lucrative market, given the excessive volume of this country’s public obligations, consisting exclusively of fixed income bonds, reaching €1.3 trillion in total. If the LSE directors had the slightest doubt that the Brexit could threaten the dominant position of their Italian company, they could have considered letting it go. But they didn’t. Obviously, they feel one hundred per cent secure, that they can continue in the foreseeable future profiting from the Italian and other European debt markets.
The Commission went even further and stated one more reason why the merger couldn’t go through. The relevant passage of the Press release says, “In addition, the merger would have removed horizontal competition for the trading and clearing of single stock equity derivatives (based on stocks of Belgian, Dutch and French companies)”. Brexit or no Brexit, the Commission was sure, that the merged company would have become a monopoly in important segments of Europe’s financial markets and consequently forbade it.
They are not afraid the Brexit
In conclusion, the two most competent agents in predicting the repercussions of the Brexit on London financial hub’s role in mainland Europe’s financial markets, seem to agree about one thing. Both the LSE and the Brussels Commission tell us there is nothing to fear or business will be as usual in the relations between the City and the Continent, at least in the foreseeable future. Obviously both parties, Britain and the European Union, don’t want to touch the present arrangement. The City is eager to continue dominating in EU’s financial universe, and the Continent doesn’t want to lose the services of London.
The City offers its competitive services to practically all the European financial firms, from the big banks to the smallest trader of stocks or bonds. From the simplest transactions on stocks and bonds to the most sophisticated derivatives, the London City is presently unbeatable. And what is even more important, everybody knows that such markets cannot be ‘ordered’ to emerge, with some EU directives. So the City in the long term will continue to offer its services to the entire EU with or without relocations. As for the London bankers’ fears, they are exaggerated if not overplayed. That kind of ‘sharks’ have always something else in mind, than what they say is at stake.