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Is the LSE and the Deutsche Borse Merger back on?

The news that the Deutsche Börse is moving Clearstream into a proposed new European consortium of clearing and settlement could be the trigger that reignites the possibility of a merger/take over between the Deutsche Börse and the London Stock Exchange (LSE). You may remember that this deal was first muted some years ago and was nearly completed but for the fact that both Exchanges operated different relationships with their clearing and settlement components. The LSE with its horizontal structure and a contracted relationship with Euroclear (formerly CREST) and the London Clearing House as opposed to the Deutsche Börse's vertical structure which compels users to clear and settle through Clearstream. One of the major reasons the deal collapsed was that neither the LSE users nor the Deutsche Börse would give up their existing clearing and settlement relationships nor pay the huge costs that it would entail.

The following years have shown that the Deutsche Börse has put itself in a corner, as their insistence on the vertical relationship with Clearstream has deterred any potential partner or takeover from taking place. It has subsequently become a bystander, as all the other Exchanges have enjoyed the flexibility offered by their horizontal clearing and settlement structures. Notably Euronext has enjoyed great success, which culminated with the NYSE deal.

The LSE equally has been through one of its most financially successful periods in its history but with times changing in Europe after MiFID implementation, the time may be nigh for a major corporate move. The biggest in Europe and globally significant collaboration would be to bring together the LSE and Deutsche Börse.

The merger would bring the Deutsche Börse out of the corner and push the LSE forward once again, as a major global player. This merger would bring serious competition to the NYSE Euronext business and be a major threat to any of the new ECNs and MTFs springing up in Europe.

The deal could include a restructuring of the Equity, Bond and Derivatives markets in Europe, where the leading investment banks would be getting the consolidation they have always wished for with the resulting cost and operational efficiencies.

This looks like the right time for the LSE and Deutsche Börse to get together and will be welcomed by many in the market, but notably not NYSE Euronext nor any of the new trading venues. Is this the next twist in the restructuring in the European Capital Markets? I for one hope so.


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Gary Wright

Gary Wright


BISS Research

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19 Sep 2007



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