Almost a year ago, the London Stock Exchange (LSE) and the Frankfurt Stock Exchange (Deutsche Boerse), proposed a merger in order to combine British, German, and Italian exchanges to create a large European market that could compete with the United States. This proposal has been widely criticised for creating a monopoly in certain sectors of the market and centreing too much power in London— an issue that has been since exacerbated by the Brexit vote to leave the European Union (EU). Equally perplexing is the fact that Frankfurt is home to the European Central Bank. And of yet, this is the third attempt to join the German and British exchanges. In recent weeks, the LSE has expressed notable concerns that the European Commission will likely not allow the deal to progress any further, despite having the widespread approval of shareholders.
It was clear to many, such as the Financial Times’ Sarah Gordon, that negotiators on both sides of the deal had ignored any possible consequences from the Brexit vote, and that these sentiments were being transferred into the deal itself. It was reported a few days after the EU referendum that, behind closed doors, some of the leadership at the LSE felt as though ‘the deal would be the first corporate casualty of the vote.’ Since the terms of the deal could not be altered after its proposal, many of the deal’s articles hinted at a failure if Brexit passed. One of those being that the headquarters post merger be in London, which naturally seemed increasingly unattractive to the Frankfurt party after the vote. This shaking of the foundation of the deal immediately after the referendum left many, including Gordon, thinking the deal was no longer worthwhile for anyone involved. However, it was not until recently that the LSE has quite publicly expressed concerns that a collapse of the deal is inevitable.
While the contract did not take into account any possible repercussions of the Brexit vote, the reason that the deal is now likely to fail stems solely from the European Commission—and not as a result of either party backing out expressing dissatisfaction with the terms. The European Commission has cited legal issues, derived from competition laws. The complaints by the European Commission seem to be levelled directly at the LSE. The Commission highlighted issues with the deal last September, including the possible lack of competition in the derivatives market, where the LSE is highly invested. In an effort to quell the fears of the European Commission, the LSE confirmed that they had sold their Paris based clearinghouse (LCH). But this was not enough to satisfy the Commission as they quickly responded suggesting that more concessions needed to be made. They argued that the LSE would need to also sell off their Italian based trading platform (MTS) in order to ensure competition was protected. The LSE was surprised that the European Commission had come back with further suggestions, and felt that selling off further assets, like MTS, would be ‘disproportionate.’ For this reason LSE refused to scrap MTS, as they felt the Commission was asking too much. The European Commission has stated they will have a decision on the deal on, or before, 3 April 2017. Leaving the LSE in a game of chicken with the Commission, one of them has to flinch and change track or the deal will likely die.
There is, however, a small glint of hope, though it relies on legal interpretation. A small technicality (established by the Commission in 2012) states that, with regards to competition, the derivatives market can be divided into two markets or interpreted as one. In 2012, the Commission viewed it as the former, and doing so again could allow the merger to pass. As previously acknowledged, this relies on an interpretation of the existing competition laws. And yet, due to the Commission’s stance, they will most likely interpret this in an unsavoury way for the deal. This presents another issue entirely, and goes on to demonstrate where the consequences of Brexit may truly have an impact.
As aforementioned, the shareholders of both parties have agreed to this merger, therefore one would assume that both sides also believe they will benefit. The primary issue lies in the politics behind the Commission’s requests and their imminent interpretation of the law. Indeed, this deal has been mobilised by the Commission as a political tool, not as a matter of business. For if the exchange of Frankfurt— home of the European Central Bank— is managed out of London, the legitimacy of the European Union would almost certainly suffer. From this position, the United Kingdom would be withdrawing from the EU but still controlling vast amounts of the European market from London. It seems as though the European Commission has found itself in a battle for political pride, and is using this deal as an example to demonstrate what the tone of the dialogue between London and the other financial centres of Europe will be after Brexit.