Trading, Clearing & Settlement: Takeover Protection through national Competition Agencies?

On August 3, 2005, the Bri­tish Com­pe­ti­tion Com­mis­sion issued its pro­vi­sio­nal fin­ding on Deut­sche Boerse’s and Euronext’s take­over bids for LSE. Accord­ing to that fin­ding, both bids for LSE would result in a signi­fi­cant les­se­ning of com­pe­ti­tion in the pro­vi­sion of tra­ding ser­vices in the UK. If Deut­sche Boerse took over the LSE, the regu­la­tors would inter alia require Deut­sche Boerse to relin­quish con­trol of Eurex, which con­tri­bu­ted more than half of Deut­sche Boerse’s annual pro­fits in 2004. Euronext would be requi­red to relin­quish its grip on LCH.Clearnet, the LSE’s cur­rent pro­vi­der of clea­ring ser­vices. Even if both poten­tial acqui­rers would com­mit to these requi­re­ments, the Bri­tish agency does not rule out the pos­si­bi­lity of pro­hi­bi­t­ing both bids as the only means to resolve the anti­ci­pa­ted com­pe­ti­tion con­cerns.

The European Com­mis­sion seeks to imple­ment European-wide capi­tal mar­kets, and one of the major fields yet remai­ning dis­in­te­gra­ted is the tra­ding, clea­ring & sett­le­ment level, which suf­fers from natio­nal frac­tio­n­a­lism. The take­over of one de facto mono­po­list natio­nal tra­ding plat­form pro­vi­der by ano­t­her one necessa­rily affects the tra­ding envi­ron­ment in the rele­vant coun­try. But, this aspect is true with respect to any of the 25 juris­dic­tions in which tra­ding takes place. Loo­king through the domestic glas­ses, the UK agency petri­fies the cur­rent frac­tio­nal struc­ture, despite the fact that the Lon­don capi­tal mar­ket and its rela­ted busi­nes­ses pro­vi­des ser­vices and capi­tal not just to the UK, but to all Europe. In the case of tra­ding plat­forms, a mar­ket deli­nea­tion that focu­ses on the domestic mar­ket pre­dicts the out­come. This method also pro­vi­des rea­sons to ques­tion the neu­tra­lity of the Bri­tish agency, in gene­ral. Given that each of the 25 natio­nal agen­cies take the Bri­tish Commission’s stance, the pro­ject of a Sin­gle European capi­tal mar­ket will fal­ter not on the level of the issu­ers (which — gene­rally speaking — wel­come sup­ply of all-European capi­tal), but on the level of the tra­ding plat­forms.

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The Commission’s stance poses uncer­tainty to any poten­tial acqui­rer of LSE and de facto func­tions as a bar­rier to take­overs. It fur­ther dis­re­gards inte­rests of all con­su­mers in Europe. It does, howe­ver, bene­fit the Lon­don dea­ler & bro­ker com­mu­nity, which can con­ti­nue enjoy­ing their easy chair despite the fact that there are com­pe­ti­tors around, which pro­vide bet­ter ser­vices at lower costs. To the bene­fit of all Europe, we can only hope that mar­kets are more intel­li­gent than regu­la­tors. (It is hard, though, to over­come the net­work effects and eco­no­mies of scale, which keep com­pe­ti­tion at bay at least wit­hin the natio­nal domain.) Thus, as a result of the Commission’s decision, we may see the less effi­ci­ent Lon­don mar­ket being abscised from capi­tal sup­ply, as more and moe capi­tal flows to mar­kets that pro­vide equi­va­lent ser­vices more effi­ci­ently. It is nevertheless a shame for Europe that the fas­test way to achieve mar­ket inte­gra­tion is blo­cked by com­pe­ti­tion law, a mea­sure which is sub­ject to European aut­ho­rity for deca­des and which – gene­rally speaking — should fur­ther, rather than ham­per mar­ket effi­ci­ency.

Dr. Dirk Zetz­sche, LL.M. (Toronto)

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