Are the authorities serious about competition in financial markets?
The news that Deutsche Borse and NYSE Euronext have today notified their proposed merger to the European merger authorities starts a critical decision-making process for financial markets.
It comes at a point when the approach to competition seems mixed. On the one hand, the proposed combination between ICE and Nasdaq to bid for and break up NYSE Euronext was blocked by the US Department of Justice on the grounds that a merger of Nasdaq and the NYSE would be unacceptable. In the UK the proposed acquisition of Chi-X by BATS has been referred to the Competition Commission for a deeper review.
At least in the US and the UK, the competition authorities seem to be serious about preserving competition among trading venues. However, simply blocking mergers between trading platforms is not enough to ensure that there is real competition. For trading platforms to be able to compete, they need access to the same post-trade infrastructure. This means either using the same clearing house or using clearing houses that interoperate with each other.
Here the picture is more mixed. After years waiting for regulatory approval of the interoperability arrangements (which was finally granted), BATS Europe has announced that it will start a three-way clearing arrangement with LCH.Clearnet, EuroCCP and SIS x-clear for BATS Europe. But at the same time, EMCF, which is the default CCP for BATS Europe, is reported as stating that it no longer supports interoperability and will not be joining these arrangements. And the latest version of EMIR limits its requirements on market access to OTC (not exchange-traded) contracts. Interoperability for derivatives is postponed pending a review by ESMA, due by the end of 2014.
The reason the decision on the Deutsche Borse-NYSE Euronext merger is so important is that it simultaneously touches all the most important issues in European market infrastructure: a merger of the two most important derivative exchanges, a merger of two major equity exchanges and the ownership of a leading clearing house (Eurex Clearing) – one which has so far declined to enter into any interoperability arrangements with other clearing houses.
It is no exaggeration to say that the decision in this case will shape the European financial infrastructure.