Futures Behemoth Seen If NYSE, Deutsche Boerse Merge

By Jacob Bunge


The proposed merger of NYSE Euronext (NYX) and Deutsche Boerse AG (DB1.XE) would create the world’s largest single market for futures trading and boost a key profit center for the two exchange groups.

The combined product slate would hold jurisdiction over nearly all of European and U.K. fixed-income and stock-index futures with a foothold in the region’s growing commodity and emissions markets.

Such a merger, said by the companies to be in early talks Wednesday, would provide only limited headway in the U.S., where exchange-traded futures business is dominated by CME Group Inc. (CME). But CME would see its longstanding position as the biggest futures exchange operator supplanted by a new rival active in more asset classes and geographies.

“This is one of the main value-drivers for the merger,” said Craig Pirrong, a professor of finance at the University of Houston who focuses on derivatives markets.

“There are substantial economies of scale and scope in the trading and clearing business,” he said. “Here, there are some advantages to being big.”

The derivatives business of the combined entity is expected to be centered in Frankfurt, according to a person familiar with the matter, and will be run by an executive from Deutsche Boerse.

Together, Deutsche Boerse’s Eurex futures platform and NYSE Euronext’s U.K.-based derivatives market Liffe had more than 3.8 billion contracts traded in 2010. CME, which runs the Chicago Mercantile Exchange, Chicago Board of Trade and New York Mercantile Exchange, traded an estimated 3.1 billion contracts.

A combination of NYSE Euronext’s and Deutsche Boerse’s European derivatives markets would echo the 2007 merger of the CME and CBOT, which left CME holding a near-monopoly on trading in futures linked to U.S. Treasury yields and major stock benchmarks such as the Dow Jones Industrial Average and the Standard & Poor’s 500.

The combined entity would harbor business in FTSE and DAX index futures as well as a range of both short- and long-dated fixed-income futures linked to British and German government debt. Liffe also would contribute its commodity markets–an area Eurex has tried to develop–and both exchange groups are angling for business in Europe’s emissions markets.

An advantage for customers would come from potential efficiencies in the way customers of both markets are able to manage the collateral required to be held against outstanding trades. Combining the pools of margin could make it cheaper for banks and hedge funds to trade, while offering flexibility to hold collateral at one facility against another would give customers more choice.

Pirrong saw dangers here, however. European regulators–one of the lynchpins to getting such a deal done–could object to such a combination of clearinghouses. In the U.S., officials in the Justice Department raised similar concerns following the combination of the CME and CBOT, and suggested that the clearing function be split off from exchange trading, which would open the market to more competition.

“The Europeans have been even more skeptical about that model,” said Pirrong.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com


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