Market Merger Draghi Looks into the Clearing Business

The ECB is examining the clearing business and merger plans for the London Stock Exchange and Deutsche Börse.
The President of the European Central Bank Mario Draghi (r) with Deutsche Boerse AG CEO Carsten Kengeter at the German stock exchange near Frankfurt in 2016.

It was only a passing remark, but it electrified listeners. Customers may already be reacting to the factors that threaten the processing of large euro securities transactions in London and are searching for alternatives, Xavier Rolet, head of London market operator LSE, said in a hearing before members of Parliament this week.

In other words, Great Britain's planned withdrawal from the European Union could already have consequences today, even though the British government hasn't officially applied to do so yet.

According to Mr. Rolet, customers are already gearing up for the impending Brexit with their clearing transactions, and are searching for new business partners abroad. And in the Brexit negotiations, euro clearing threatens to become a pawn between Great Britain and the European Union. The European Central Bank is concerned over whether supervision of euro clearing will still be granted after Great Britain withdraws from the bloc. The ECB fears that as a result of Brexit, ECB regulation of important British market players could weaken.

"That is why it will be important to find solutions that uphold the current level of supervision and control or, ideally, even improve it," reads a letter from the ECB president Mario Draghi.

The markets are paying close attention to the discussion of the consequences of the Brexit for the clearing business.

The tug of war over clearing could also have consequences for the planned merger of the LSE with Deutsche Börse. The central bank is considering a "careful" review of the roughly €25 billion ($26.5 billion) deal, according to a letter from Mr. Draghi to Pervenche Berès, a French member of the European Parliament, which has now come to light.

According to Mr. Draghi, this is necessary when a merger leads to changes in the ownership structure of a bank in the euro zone. Both stock exchanges are important players in the clearing of derivative transactions. Investors who use derivatives to hedge against market fluctuations are increasingly using clearing houses, which step in when a counterparty drops out. Because the clearing houses use bank licenses for their transactions, they are subject to banking supervision.

The markets are paying close attention to the discussion of the consequences of the Brexit for the clearing business. But a spokeswoman noted that the current regulation continues to apply. "We don't want to anticipate any decisions that politicians, central banks or regulators could make in the future," she said.

The merger partners need the European Commission's approval and want to prevent the exchange supervisory authority in the German state of Hesse from upsetting their plans.

E.U. Competition Commissioner Margrethe Vestager fears that the merged company could dominate the market for clearing derivative transactions. To ease their concerns, the LSE plans to sell its French clearing subsidiary to competitor Euronext. The competition watchdogs have not taken the sale into account yet in their review of the situation. Officials at Deutsche Börse said that they and the LSE are still working constructively with the European Commission.

The exchange supervisory authority in Hesse could also block the deal if it sees it as a threat to the survival of the stock exchanges. Tarek Al-Wazir, the Hesse economics minister and a member of the Green Party, doesn’t want to commit himself before Brussels has reached its decision. "I'm not saying a word about this," Mr. Al-Wazir said on Thursday in Frankfurt, adding that a hasty decision could make the state vulnerable to prosecution.

The two market operators' location plans have sparked criticism, especially in Hesse. The merger agreement provides that the legal seat of the new giant stock market must be located in Great Britain. This means that it would not be located in the European Union after Brexit.

Frankfurt Mayor Peter Feldmann hopes that the markets will adjust their location plans, though. "I've noticed some activity," he said.

The stock exchange, however, is insisting on the outline of the merger agreement. In a recent guest commentary in German daily Die Welt, Deutsche Börse chief executive, Carsten Kengeter, argued that the merger strengthens Frankfurt as a financial center. Besides, he added, Deutsche Börse will still be subject to the supervision of German regulators.

Whether the regulators find this convincing will soon be clear. The European Commission plans to reach a decision on the deal by March 13. Then the ball will be in the Hesse exchange supervisory authority's court.


Michael Brächer is a financial editor on the investment team in Frankfurt. Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. Katharina Slodczyk is Handelsblatt's London correspondent. To contact the authors: [email protected], [email protected][email protected]