Stock Exchange Merger

Euro Clearing May Move to Frankfurt

frankfurt skyline-dpa-Frank Rumpenhorst
The Frankfurt skyline.
  • Why it matters

    Why it matters

    Clearing transactions in euros are mostly processed in London today, but this could well change if Great Britain leaves the European Union. That could impact pending merger between Deutsche Börse and the London Stock Exchange.

  • Facts

    Facts

    • At least 60 percent of Deutsche Börse’s shareholders have to approve the merger with London Stock Exchange, the exchange announced Monday, lowering the number from an earlier 75-percent threshold.
    • London Stock Exchange subsidiary LCH will likely be forced to move its euro clearing business to the continent thanks to the Brexit.
    • In addition to shareholders, the European Commission and exchange regulators in the German state of Hesse must approve of the merger.
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    Audio

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Deutsche Börse Chief Executive Carsten Kengeter wants to bring the lucrative euro transaction clearing market to Frankfurt if the proposed multi-billion-euro merger with the London Stock Exchange goes ahead, Handelsblatt has learned.

Mr. Kengeter hopes the plans will persuade lawmakers and regulators to back the merger, which would create one of the world’s largest stock exchanges, but also still has to be approved by Deutsche Börse shareholders.

The merger – the third time these two firms have tried to join their operations in the past decade – has been in additional trouble ever since Britain voted to leave the European Union on June 23.

On Monday, Deutsche Börse said it would extend by two weeks the deadline – initially set to expire Tuesday – for shareholders to accept its offer. It also lowered the threshhold for the deal to go through to make it easier for index funds to tender their shares. At least 60 percent of shareholders must now participate for the deal to go through, down from at least 75 percent. Lowering the threshold will technically enable index funds to more quickly offer their shares for the deal.

Clearing euro transactions out of Frankfurt is intended as an additional sweetener for German shareholders.

“The merger could allow Frankfurt to become the center for the clearing of euro transactions,” said one source. Deutsche Börse declined to comment on the matter.

If the merger materializes, LCH could move its euro clearing operations to Frankfurt.

Most clearing transactions denominated in euros are currently processed in London, even through Great Britain is not a member of the euro zone. Last year, the British secured the right to process such euro transactions before the European Court of Justice. If Great Britain leaves the European Union, it will probably no longer be possible for transactions denominated in euros to be processed there. French President François Hollande has even said he would want the service to move.

British provider LCH plays a major role in the clearing of derivative transactions denominated in euros. LCH has processed €105 trillion ($116 trillion) in swap transactions since the beginning of the year alone. This is where the merger of the two exchanges comes into play, because LCH is owned by the London Stock Exchange. In the event of a Brexit, LCH would probably have to move its euro clearing business to the Continent.

LCH declined comment on the matter but any possible move would play into the hands of Mr. Kengeter and his team.

 

Merging Frankfurt and London's Stock Exchanges-01 deutsche börse boerse LSE

 

If the merger materializes, LCH could move its euro clearing operations to Frankfurt.

“Then Frankfurt could become the clearing center in the euro zone,” said one source.

If the merger falls apart, LCH could handle its euro clearing business through a subsidiary in Paris. However, it cannot be taken for granted that this will happen, partly because it depends on whether and how Great Britain structures its departure from the European Union.

Still, these are the kinds of arguments Mr. Kengeter can use at the moment, given the skepticism among lawmakers and regulators over the merger plans. But for now the ball is in the court of Deutsche Börse shareholders, who have until Tuesday to exchange their shares for those in the new combined exchange. About a quarter of shareholders have already done so, but typically most investors wait until the last minute to make their move.

According to the securities prospectus, the final outcome of the vote will be revealed on July 18. Then, under a rule designed to help those who could not decide, remaining shareholders another two weeks to make up their minds.

The next move is up to the regulators. Officials in Frankfurt expect that the European Commission will initiate an in-depth examination, which can take several months. The exchange supervisory authority in the German state of Hesse must also approve of the deal. The transaction could be complete by the first or second quarter of 2017.

Both exchanges have many obstacles to overcome before then. The offer to shareholders states that the legal domicile of the combined company will be located in London. But in light of the pending Brexit, Mr. Kengeter is proposing a dual holding company or headquarters in a neutral location, such as Amsterdam. A change of this nature, however, would probably only be possible once the transaction is formally complete.

To that end, the two exchanges will first need to reach an agreement with one another.They have formed a referendum committee, which is scheduled to meet for the first time in the coming weeks. The subject of location will be discussed at that meeting.

German Finance Minister Wolfgang Schäuble has already made it clear that the location of the combined exchange’s headquarters is not the main issue for him.

“The more important question is which business units remain in Frankfurt and which ones in London,” he said.

Exchange insiders speculate that his comment was a reference to the clearing business, although officials at Mr. Schäuble’s ministry were unwilling to confirm that.

 

Michael Brächer is a financial editor in the investment team in Frankfurt. Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. Katharina Slodczyk is Handelsblatt’s London correspondent. To contact the authors: braecher@handelsblatt, drost@handelsblatt.com  and slodczyk@handelsblatt.com

 

 

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