Deutsche Börse / London Stock Exchange ACE conference, Madrid

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Deutsche Börse / London Stock Exchange ACE conference, Madrid Gábor Koltay DG COMP, CET 16 November 2017

The LSE / DBAG transaction EUR 27bn deal Globally third Europe's largest exchange by far Prohibition: fixed income clearing fixed income settlement, custody and collateral management single stock derivatives clearing and trading , 24 August 2016 Notification 28 September 2016 Art. 6(1)(c) decision 29 March 2017 Art. 8 Adoption 6 February 2017 Remedies submitted 27 February 2017 Final remedy deadline March to August 2016 (23 June 2016 Brexit vote ) 13 December 2016 Statement of Objections Pre-notification Phase I Phase II

Exchanging financial products Composite service Listing, Trading, Clearing, Settlement Financial exchanges = point of sale In-house vs. multi-firm service modes Bundling vs. free customer choice Several financial products Equities, derivatives, bonds, repos Links between products, for example correlated risk profiles

Overview of the parties' activites

The main theories of harm Bonds + ATS traded and CCP cleared repos Small increment, but parties the only clearing service providers Vertical foreclosure of Euroclear in settlement Strong position in upstream clearing and DBAG's presence in settlement services (Clearstream) Single stock derivatives Large horizontal overlap from in-house and multi-firm service offerings Remedy: Part of LSE's clearing house (LCH SA) Market test 1: MTS, a trading platform, necessary for viability Market test 2: Scope economies in clearing question LCH SA's competitiveness

Merger effects with composite services Single stock derivatives DBAG integrated bundle: own clearing and trading services (C1 and T1) Eurnext composite bundle: LSE clearing (C2) and of Euronext trading services (T3) Vertical and/or horizontal effects?

Horizontal and vertical effects Single stock derivatives A simple model of complements: Economides & Salop (J. Ind. Econ., 1992), Choi (J. Ind. Econ., 2008) Similar arguments, different framework: Inderst & Valletti (Scand J Econ, 2009) Both horizontal and vertical effects Horizontal for integrated bundle: Incentives to increase the price of T1C1 due to classic diversion Margin squeeze through price of C2: due to classic diversion, merged firm will increase price of C2 Price of T3 and the C2T3 bundle is ambiguous

Economies of scope and competitive assessment – Interest rate derivatives Economies of scope in clearing Less costly to clear two financial products with negatively correlated risk (Cross-margining, portfolio margining)  Incentives to clear on one platform  Facilitates entry to a negatively correlated market Interest rate derivatives How strong are the scope economies for the new entrant? DBAG LSE Exchange traded Eurex Curve global OTC Clear LCH OTC