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NYSE, Deutsche Börse scramble to find right remedies

by Renee Cordes | Published November 9, 2011 at 4:02 PM

A day after their latest meeting with European Union antitrust watchdogs, NYSE Euronext and Deutsche Börse AG are scrambling to concoct a winning recipe of remedies -- not too hot, not too cold -- to appease regulators. Experts predict it will be a "messy" process and generally agree that divesting NYSE Euronext's futures exchange, known as Liffe, won't be one of the options on the table.

Executives from both companies and their lawyers were in Brussels for a so-called state of play meeting Tuesday, Nov. 8, with high-ranking antitrust officials scrutinizing their $9 billion merger. A routine part of any in-depth probe, the closed-door session generally represents the last chance for merging parties to try to sway regulators' thinking before offering conditions for getting a deal cleared.

"Once the merging parties have had a state of play meeting, the Commission is more difficult to move," said Simon Holmes, the London-based partner in charge of SJ Berwin LLP's EU and competition department.

"Now it is coming down to the crunch," he added, "with the decisive issue being how hard will the Commission push for extensive remedies, and how far are the parties wiling to go."

The companies have until Nov. 17 to submit concessions. At that point, regulators will be obliged to extend the deadline it set to conclude the review by at least 15 working days, from Dec. 22 to Jan. 23.

In public, at least, NYSE Euronext chief executive Duncan Niederauer continued to ooze optimism about the European Commission review, assuring employees in a recent e-mail that "we agree with the Commission on much more than we disagree."

Late on Tuesday the companies announced that 97.04% of Deutsche Börse shares had been tendered.

But the regulatory risk remains a difficult hurdle.

Behind the scenes, the companies are scrambling to find the right mix of remedies to appease regulators, whose initial investigation raised red flags in several areas, including derivatives trading and clearing. NYSE Euronext's London International Financial Futures and Options Exchange, or Liffe, is a key focus.

More recently, regulators have expressed concerns over the companies' monopoly in exchange-traded derivatives, rejecting arguments to take a broader view and consider over-the-counter competition.

What could the companies do to reassure regulators?

As a general rule, "remedies which are typically most acceptable to competition regulators are ones which are clean, clear-cut, solve the identified problem and do not require any or much supervision," said Suzanne Rab, a London-based antitrust partner with King & Spalding LLP.

To a large extent, Niederauer refuses to go down that path, declaring in last week's third-quarter conference call that "the logic of the combination would not hold together if we were asked to give too much."

In cases such as this, where selling assets is not a viable option, Rab said, "The question becomes what is a remedy package that is not a dealbreaker but is sufficiently attractive that it addresses the Commission's and third parties' substantiated concerns, and is not overly onerous in terms of policing."

With the remedy deadline quickly approaching, a couple of scenarios are emerging.

Holmes sees the degree of access to clearinghouses as the key battleground between the companies and regulators. "The parties will most likely offer the Commission a broader package of remedies beyond just granting some degree of third-party access to Eurex clearing," he said.

While regulators would also presumably be very happy with an offer from NYSE Euronext to give up Liffe, that is pretty much ruled out, as it would defeat the strategic rationale of the deal.

Nevertheless, the companies may be forced to give up some products traded on Liffe, said a former executive of alternative trading platform Chi-X Europe Ltd.

"You don't have to give up the brand and Liffe per se, then you're almost giving the competition a head start," said Hirander Misra, the former chief operating offer of Chi-X who now runs his own London-based consultancy, Misra Ventures Ltd.

Misra suggested that the merger partners could go through the long list of products traded on Liffe and decide which ones to give up as a sweetener.

"Everything that I've seen seems to suggest there is room for maneuver in terms of negotiating rather than going down the extreme of giving up Liffe," Misra said.

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NYSE, Deutsche Börse scramble to find right remedies

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