Deutsche Boerse AG's planned takeover of NYSE Euronext faces intense scrutiny from German regulators and European anti-trust authorities, potentially putting the blockbuster exchange tie-up in peril.
It could also face hurdles in Washington as U.S. lawmakers and regulators consider whether they are prepared to allow the citadel of American capitalism to fall into foreign hands, although early criticism was muted.
The companies said on Wednesday they are in advanced talks to join forces and create an exchange operator with unprecedented global reach and -- most worrisome for regulators -- a dominant grip on Europe's lucrative derivatives markets.
While executives from Frankfurt and New York have hatched a tentative agreement, there are still obstacles that must be overcome -- hurdles that have scuppered attempts to combine Deutsche Boerse with Paris-based Euronext.
These key questions are not yet resolved, a senior German financial source told Reuters on Thursday.
A financial regulator from the German regional state of Hesse -- which must approve the deal -- said it would seek to preserve the interests of Frankfurt as a financial center. Once notified, European Commission competition authorities have 25 days to decide on the case.
The biggest danger of a failure for the deal at this point is antitrust concerns in the derivatives market, because Eurex and Liffe would have a market share of more than 90 percent in Europe. We consider these concerns as overdone, said Stefan Brugger, a fund manager at Union Investment in Frankfurt.
U.S. politicians were unusually quiet about the deal that would see the Big Board bought out and would put more than 40 percent of U.S. options trading under one roof.
U.S. Commodity Futures Trading Commission Chairman Gary Gensler said the companies informed his agency of their plans on Wednesday, although he declined further comment.
In France, Economy Minister Christine Lagarde said she was watching negotiations closely with an eye on market stability and security, and the development of value on French soil. French regulator AMF said it would be vigilant about preserving Paris as a financial center.
DERIVATIVES AT ISSUE
The exchange operators have released few details on the merger, raising questions about what benefits will fall to shareholders and how the combined company would distribute its headquarters and executives on the two continents.
The combined group's derivatives unit -- the key money maker -- will be headquartered in Frankfurt, while New York will get stock trading, two people close to deal told Reuters. Another source said Paris would handle European equity trading, including what is now done in Germany.
Given the fact that the merger will create the biggest stock exchange in the world, there are lots of regulatory, corporate and competition issues to be solved, said Susanne Rueckert, a partner and specialist in capital markets at German law firm FPS.
It will be a perfect test whether the national authorities will be prepared to make concessions on the further globalization of the financial markets.
The U.S. Securities and Exchange Commission would have to sign off on the merger. It could also draw anti-trust scrutiny from the Justice Department and could spark a review from the Committee on Foreign Investment in the United States, a body overseen by the Treasury Department that deals with the security aspects of foreign investments in U.S. companies.
EUROPEANS BUYING NORTH AMERICANS
The Deutsche Boerse-NYSE Euronext news immediately overshadowed an announcement earlier on Wednesday that London Stock Exchange Group Plc agreed to buy Canadian exchange operator TMX Group Inc.
That transatlantic deal, which would create an operator with a market value of some $6.9 billion, met sharper resistance as politicians raised questions about Canadian sovereignty and whether it would provide a net benefit for Canadians.
With exchange consolidation back after a few quiet years, competitors around the world were sent scurrying to find partners, accelerating an industry shake-up.
Hong Kong Exchanges and Clearing Ltd was quick to open the door to deals with other players on Thursday following news Deutsche Boerse and NYSE were in advanced talks.
HKEx, the world's biggest exchange operator by market value, said it would consider international alliances or partnerships consistent with its focus on China.
Traditional exchanges are under intense cost pressure from upstart electronic rivals such as Bats Europe, Chi-X Europe and Direct Edge, which were set up by the world's largest investment banks to loosen the big bourses' grip on share trading.
The proposed mergers fueled a rally in shares of listed exchanges globally.
Deutsche Boerse shares jumped 6.4 percent to 61.10 euros. Australia's ASX, which is trying to overcome domestic opposition to a $7.9 billion takeover bid from Singapore Exchange Ltd, rose 4.7 percent.
The race is on to create regional trading gateways to serve international institutional investors and the drivers are accelerating, said Axel Pierron, an analyst at Celent.
(Additional reporting by Mike Smith, Saeed Azhar, Kevin Lim and Rachel Armstrong in Singapore, Sonali Paul in Melbourne, Arno Schuetze, Harro ten Wolde, Edward Taylor, Josie Cox and Philipp Halstrick in Frankfurt, Foo Yun Chee in Brussels and Emma Farge in London; additional writing by Alexander Smith; editing by Sophie Walker and Andre Grenon)