On 29 March 2017 the European Commission announced that it has prohibited the proposed merger between Deutsche Börse AG and the London Stock Exchange Group (LSE), the two largest European stock exchange operators. Together the parties own the German, Italian and UK stock exchanges, as well as several of the largest European clearing houses.

The Commission concluded that the merger would create a “de facto monopoly” in the markets for clearing of fixed income instruments (such as bonds and repurchase agreements) in Europe. This would also have a knock-on effect on the downstream markets for settlement, custody and collateral management, as Deutsche Börse’s Clearstream competes with service providers in those markets and the merged entity would therefore have the ability and incentive to foreclose competitors. In addition, the merger would reduce horizontal competition for the trading and clearing of single stock equity derivatives as Deutsche Börse’s Eurex currently competes with a bundled product offered by LCH.Clearnet SA (the LSE’s France-based clearing house) and Euronext.

The Commission had formally communicated its concerns to the parties in a Statement of Objections in December 2016. In response, the LSE committed to divest LCH.Clearnet SA. The Commission held that although this would have resolved its concerns relating to single stock equity derivatives, this would not be adequate to remedy the concerns regarding the de facto monopoly in fixed income clearing, as the market test had shown that LCH.Clearnet SA’s fixed income clearing business is vitally dependent on trading feeds from the LSE’s Italy-based fixed income trading platform MTS (in which the LSE holds a controlling 60% stake, the remaining 40% being widely held by various financial institutions). The Commission therefore could not establish the viability of an independent LCH.Clearnet SA as a competitor in fixed income clearing.

The Commission’s decision to block the merger is not completely unexpected. The Commission had told the parties that it would consider the divestment of MTS to be an adequate remedy. The LSE however announced on 26 February 2017 that it was not prepared to commit to sell its stake in MTS, and that in light of this it seemed “unlikely” that the Commission would clear the merger.

This is the third attempt at a merger between Deutsche Börse and the LSE, after two previous potential deals in 2000 and 2005. Prior to this, the Commission’s last prohibition decision was in relation to the proposed Three/O2 merger in May 2016. Including the current case, it has prohibited seven mergers in the last 10 years.