The Futures Industry Association (FIA) and major Wall Street banks have cranked up the rhetoric against the concentration of power in the new Chicago mega-exchange that would be formed if the proposed merger between the CBOT and CME goes through as planned. The Justice Department has not yet signed off on the $9 billion merger plan and could squash the deal if it determines the concentration of power diminishes competition.
“FIA acknowledges that the merger could have short-term cost savings and operational efficiencies,” the group said in a mid February statement. “In FIA’s view, however, the merger would concentrate significant market power in the new CME Group, substantially lessen competition among U.S. futures exchanges and raise even higher the barriers to entry for new competitors.”
A few weeks later, exchange executives lashed out in an interview with the Chicago Sun-Times, accusing Wall Street firms of politicizing the merger in an effort to preserve their own quiet dominance in the over-the-counter (OTC) derivatives market. “Fighting the merger is the only way they can bifurcate the market for their own profit and their own self-interest,” CBOT chairman Charles Carey told the paper.
FIA President John Damgard told Futures that his concern flowed from the concentration of pricing power on the clearing and settlement front. “In Europe the competition people have put a lot of pressure on the exchanges to get away from these silos,” he said. “Maybe there are some conversations taking place between the competition regulators in Europe and the [U.S.] Justice Department.”
Europe’s new model?
Swiss-German futures exchange Eurex would technically have more autonomy under a proposed restructuring that could see derivatives, equities and clearing broken into three business units owned by one holding company. The proposal has sparked speculation that the continent’s last great vertical silo of execution, clearing and settlement could be on the way out.
“At this point, we’re not really sure what’s happening, but it appears Deutsche Boerse is gearing up to restructure for technical purposes [like freeing up capital],” says Michael Dros, an analyst at Cologne Bank.
Several major shareholders, led by U.S. asset manager Atticus Capital, are pressuring the exchange to restructure, and exchange boss Reto Francioni seems to agree. In early March, he accepted the resignations of two Deutsche Boerse board members who had opposed the move, and sources at the exchange say employees are operating on the assumption that change is in the air.
While Eurex would likely become a legally distinct business unit within the operation, most attention is focused on what happens to Clearstream, the company’s equities clearing and settlement powerhouse. It’s not clear where Eurex Clearing, which handles derivatives clearing and settlement, would land.
From a management perspective, walling off Clearstream as a separate unit will allow Deutsche Boerse to apply its banking license to just that unit, meaning it will not be forced to apply banking capital requirements to the entire Deutsche Boerse structure. This could free up as much as €2 billion ($2.6 billion) in funds, which can be distributed to shareholders. It would, theoretically, also give Deutsche Boerse a hefty war chest to pursue expansion.
The move comes as cross-continental clearing rival LCH.Clearnet buys back the shares owned by Euronext, giving the clearinghouse more autonomy and enabling sharp reductions in fees. Shareholder activists have long complained that cross-border clearing and settlement in Europe is too expensive, due to incompatible laws in different countries and to the high cost of transferring shares among clearing and settlement entities.