Frankfurt’s Deutsche Boerse and the London stock exchange (LSE) on Wednesday, March 16, announced that agreed to join. The merger will be the largest deal between stock exchange operators from 2013, when the Intercontinental Exchange (ICE) acquired control of the new York stock exchange NYSE Euronext. It already the third attempt of the Frankfurt and London stock exchanges to merge — the previous two failed in 2000 and 2005. This transaction will take place, if the Deutsche Boerse proposal will not interrupt global competitors — ICE and CME Group, which manages the Chicago Mercantile exchange.
What happens as a result of the merger?
After the unification of the main trading platforms UK with the largest German stock exchange will be a new Playground, which, according to Moody’s, will be the largest in Europe. LSE and Deutsche Boerse will be able to compete on size and scale of operations of U.S. competitors, primarily CME Group and ICE, Reuters writes.
The combined exchange group will become the first in the world in terms of revenue (total revenue exchanges in 2015 amounted to €4.7 billion, with EBITDA of €2.2 billion) and the second by market capitalization. Now the total market value of LSE and Deutsche Boerse is over $30 billion Big market value — $32.7 billion — only CME Group, the owner of the commodity exchanges in new York and Chicago.
The aggregate value traded on the stock exchanges of the two companies is almost $6.1 trillion. On this indicator it takes the third place in the world, ahead of Tokyo and Shanghai with close to exchange and the NASDAQ, which traded paper companies with a total capitalization of $7.5 trillion, according to Bloomberg. But for the leader of the far: NYSE Euronext sells securities of companies that are worth in total nearly $20 trillion.
Estimated LSE and Deutsche Voege, the combined exchange will rank second in the world in terms of derivatives trading with an annual turnover of 2.3 trillion of contracts after CME Group (3.5 trillion of contracts in 2015).
Head of trading IR “Aton” Yaroslav Podsevatkin said that the merged exchange would create a global company with leading positions in the shares, derivatives, indexes and clearing. In global markets will be able to compete only a few operators in the U.S. and Asia. “In Europe, this exchange will be dominant,” — said Podsevatkin.
Why do stock exchanges to merge?
“I wouldn’t negotiate, if I wasn’t convinced that this is the best option for the group Deutsche Boerse”, — quotes words of the head of the German exchange Carsten Kengeter newspaper Deutsche Welle. Its decision to merge with the LSE, he explained the growing competition on European and global financial services markets.
In recent years to expand its presence in Europe seek the American stock exchange. In 2012, Intercontinental Exchange acquired in Britain’s International petroleum exchange (International Petroleum Exchange, IPE), in 2013 — London stock exchange financial futures and options (LIFFE), and in 2015 — trading platform, Trayport, specializing in commodities. CME Group in 2014 opened in the London stock exchange for trading derivatives — CME Europe.
Another competitor of the London Stock Exchange and Deutsche Boerse — established in 2005 BATS. It combines a number of trading platforms in the USA (BZX Exchange, BYX Exchange, EDGA Exchange, EDGX Exchange) and Europe (Chi-X).
“I think that the goal for all is obvious — to win the competition with U.S. exchanges and MTF [Multilateral Trading Facility is the OTC trading platform] which several years ago began a very aggressive expansion in Europe,” says Vice-President of the “Opening Capital” Grigory Kozin.
In a joint presentation at the LSE and Deutsche Boerse notes that the Association will give the exchanges the ability to cut €450 million in costs annually.
How to change the business exchanges?
Trade shares for both exchanges is not the main business. According to estimates of UBS, LSE Group share of annual revenue from the trading of shares is only 17%, the Deutsche Boerse — 7%. One of the main businesses for LSE — clearing interest rate swaps. Owned by the London stock exchange the company LCH.Clearnet calculates 95% traded in the world interest rate swaps with a turnover of more than $1 trillion. The main revenue of the German stock exchanges also formed from clearing: in particular, from the calculation of futures contracts. Deutsche Boerse owns a trading venue for derivatives Eurex, where more than 2 billion transactions in futures and options in the year. On Eurex accounted for about 45% of revenue Deutsche Boerse.
Clearing business plays a Central role in the deal, admitted Xavier Rolet. He clarified that the clearing house will not be physically combined, the data centers and the management companies will be separate.
Citibank analysts Owen Jones and TEM Heli believe that the combined platform will be able to claim a share of 35% of the market clearing in Europe. According to a joint study by LSE and Deutsche Boerse, after the unification of the clearing and trading of derivatives will remain the main source of income of the consolidated exchange, occupying not less than 37%. The second leading source of income for exchanges will be the provision of information services (28%). To trade exchange-traded instruments (stocks, currency, bonds) will have in the structure of income only 14%.
What are the expected benefits of the transaction market participants?
Purchase LSE will allow the buyer, whether it is Deutsche Boerse, the Intercontinental Exchange, or CME Group, to help its customers to make significant savings on transactions with derivative financial instruments, notes the Financial Times. “Single clearing will save you money brokers. If a trader, for example, has a position in the shares and simultaneously hedges its risks by buying a derivative instrument in another trading platform, in a single clearing these two positions can be mutually taken into account. Due to this, the exchange may require the participant less the amount of security than if the trader were traded on two different venues,” says Grigory Kozin. In addition, according to the financier, brokers will be able to save on the clearing; there’s a chance that a new site will open access to other clearing organizations, as this will increase competition among them and increase the number of participants.
What will happen to the listing of companies traded on the LSE and Deutsche Boerse?
“For issuers, most likely, everything will remain unchanged. According to the plan, after the merger, the holding company of the consolidated exchange will be based in London, but all current operation will be the same as before — in Frankfurt and London,” says Yaroslav Podsevatkin. He noted that the regulations and requirements of stock exchanges for issuers in Europe is largely uniform.
According to Kozin, the monitoring sites under the centralized European regulation, so for issuers, most likely, will not matter where you get the listing.
Why failed the first two attempts of unification?
Deutsche Boerse twice made the proposal LSE in 2000 and 2004. Both times against the deal was made by the LSE shareholders who have questions as to how United will be managed by the structure. In 2005, after the second failed merger lost his job, the CEO of Deutsche Boerse, Werner Seifert. After that, the German stock exchange tried to negotiate a merger with the second-largest European stock exchange Euronext, Deutsche Boerse but in these negotiations bypassed the new York stock exchange (NYSE).
After that, Deutsche Boerse tried to merge with NYSE Euronext, but the European Commission blocked the deal, ruling that the combined company will fall under the category of “quasimonopoly”. The probability of approval of the present deal above: LSE and Deutsche Boerse in many areas are not competitors. LSE is mainly engaged in the indices, clearing and trading of shares, while Deutsche Boerse gets most of the profits from the futures trading.