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Editorial: Deutsche Börse's legal challenge is not just sour grapes
21 March 2012
Why the Competition Commission's decision conflicts with EU regulation.
Many in the industry have met Deutsche Börse’s challenge to the European Competition Commission’s decision to block its merger with NYSE Euronext with accusations of sour grapes. However, it is essential that the ground rules of European exchange mergers are clear as the boundaries between OTC and exchange traded derivatives blur.
DG Comp found that there was no justification to NYSE’s and DB’s claims that the OTC and ETD markets compete. To support this it argued: OTC and ETD fulfil different customer demands; ETD products are fully standardised and smaller, more liquid contracts compared to OTC; and OTC derivatives “by definition cannot be traded on exchange”.
Compare that with article 3.3.8 of the current Markets in Financial Instruments Regulation which states that the regulation will “shift trading of suitably developed [OTC] derivatives to [exchanges and electronic platforms] as they will impose that eligible derivatives are only traded on regulated markets, MTFs or OTFs”.
There is an obvious contradiction in the DG Comp’s ruling and the intentions of European regulation and it is this contradiction that will be at the heart of DB’s challenge.
The issue of market definition will be crucial as the OTC landscape develops. The appeal is not an attempt to resuscitate the deal, that is dead now, nor is its primary motive commercial and an attempt to recoup losses. It has launched the legal action in order that it can impress upon the Commission the challenge that exchanges will face from OTFs and MFTs in derivatives over the coming decade.
The world of OTC derivative trading will be dominated by inter-dealer broker platforms structured as MTFs and OTFs. Traditional derivative exchanges will be wary of the impact that MFTs have had in equities where Bats and Chi-X have garnered a 25% market share in equity trading in a few years since their launch. Their merger was recently passed by the UK Competition Commission, presumably as it quite rightly acknowledged that they compete with the exchanges.
So the DB challenge is not about the here and now but about how the market will develop. A 90% market share of exchange traded derivatives may have been too much for the EU to accept today but this is not about competition as the market exists today. As OTFs and MFTs adopt OTC trading and contracts become more liquid and standardised, there will be very real competition between OTC and ETD and DG Comp has done itself no favours by not recognising that.
Deutsche Börse wants to ensure that it can acquire liquidity pools in the future, and the market will benefit from a longer term vision from the EU. As this magazine has argued before, the move to merge could not have come at a worse time as regulation was being debated that attempted to open up competition in European ETD markets. Waiting until that legislation had passed would not only have given it more visibility on how open access to clearing might be mandated, it would also have strengthened its argument over the competition with OTC.