The proposed merger of Europe’s two biggest financial exchanges is effectively bullet-proofed against a British vote to leave the European Union, London Stock Exchange Group and Deutsche Boerse said last week.
The two have set up a committee to advise on the implications of the UK’s June 23 vote, but said their politically sensitive merger proposal would prosper regardless.
“(It) would be well positioned to serve global customers irrespective of the outcome of the vote ... the outcome of the referendum would not be a condition of the potential merger,” they said in a statement, despite warning a vote by Britons to leave would put the EU’s Capital Markets Union project at risk.
A deal would combine the LSE’s share-trading operation with the derivatives trading of Deutsche Boerse’s Eurex in a group worth almost $30bn. It would propel the companies to a similar scale as US exchange ICE, which has taken a huge slice of the European derivatives markets.
If Britons do vote to leave, even if trading volumes in stocks and other instruments move out of London, the likely beneficiary would be Frankfurt, giving the combined exchanges an effective hedge.
The deal between LSE and Deutsche Boerse follows two failed attempts to join forces in the past 16 years. Both are confident this time is different.
The proposal is effectively a takeover of the LSE by its German rival at a time when Britain is concerned about a loss of influence to the continent if it leaves the EU.
Peter Thorne, analyst at Edison Investment Research, agreed a Brexit vote was unlikely to impact the deal as the financial infrastructure business and regulation are increasingly global.
“But Brexit is a political process, so financial logic may not be the only concern. The referendum committee seems a necessary precaution,” Thorne said.
A source familiar with the deal said it had been structured to support the LSE in the event that a “Brexit” triggered a move by the European Central Bank to prevent euro-denominated products like bonds being cleared outside the euro zone.
This would hit LSE’s LCH.Clearnet business.
“These products could then be cleared at other parts of the company,” the source said. Getting a deal done could prove a political tight-rope walk, with one major sensitivity the issue of where the combined exchange would be based.
While the main domicile would be Britain, with a primary listing in the blue-chip FTSE 100, it would also have a home on the Frankfurt Stock Exchange and have corporate headquarters in both cities.
The Economy Ministry in the German state of Hesse where Deutsche Boerse is based said it would check the eventual merger application to see if the operations of the exchange in Frankfurt could be harmed by the deal.
“The location of the new holding company will also figure into the analysis,” said the ministry. “If the facts prove that the merger is indeed detrimental, the supervisor can block the merger.”
The talks are also being watched closely in Berlin.
Carsten Schneider, a senior lawmaker in Germany’s Social Democrats (SPD), told Reuters he would welcome the creation of a large European exchange that is not susceptible to a takeover. But it was crucial that growing business activities continue to be carried out in Frankfurt.
“Above all for me, it’s important where future taxes will be paid,” said Schneider.
People familiar with the deal said they did not expect antitrust watchdogs to ask for divestments, for example in the clearing operations, to grant approval for the deal. They added there is a “Plan B” in case regulators do ask for remedies.
The exchanges on Friday confirmed long-standing LSE Chief Executive Xavier Rolet would step down in favour of Deutsche Boerse peer Carsten Kengeter.
Joining him in the boardroom would be LSE Chairman Donald Brydon and Chief Financial Officer David Warren, both of whom would retain their positions in the new company.