Discussion by Thomas Rønde Copenhagen Business School thr.ino@cbs.dk LSE / Deutsche Börse Discussion by Thomas Rønde Copenhagen Business School thr.ino@cbs.dk

Theory of Harm: Bonds and Repos Pre-merger situation: C2 may exploit its market power vis-a-vis T3 C1/T1 benefits if T3 pays high input price C1/T1 has an incentive to undercut C2 Commitment required? T1 T3 C1 C2

Theory of Harm: Bonds and Repos Post-merger situation: Merged firm increases input prices to increase final prices Shift demand to own bundle No commitment required T1 T3 C1 C2

Theory of Harm: Equity Derivatives (F, NL, BE, P) Higher input prices would increase ICE’s incentive to deviate and serve Euronext EUREX ICE Euronext T1 T3 T4 LCH SA C1 C2 C4

Post-Trade Services Two large International Central Securities Depositories (ICSDs) that offer settlement and custody services: Euroclear > Clearstream (DBAG) ICSDs are strong in repos and bonds Cross-system settlement is more expensive: Higher operating cost, failure rate, and liquidity requirement Incentive to pool assets in one system (“single-homing”) CCPs provide ”feeds” to ICSDs

Post-Trade Services: Theory of Harm Cleared repos are particular important for customers: High frequency, high quality assets Parties have monopoly on clearing repos Parties can foreclose Eurostream: Move settlement of repo trades to Clearstream Customers will follow to avoid cross-system settlement Parties have an incentive to foreclose Eurostream: Eurostream offer lower quality at higher cost Parties benefit from price increase and customer migration Network effects: incentive to move other assets to Clearstream

Post-Trade Services: Theory of Harm Assets are used for other transactions than cleared repos, and Euroclear > Clearstream in fixed income transactions Moving settlement to Clearstream (unilaterally) results in a lower service quality offered to customers at Euroclear: Move to Clearstream, a smaller and less attractive system Stay with Euroclear and face higher settlement costs Lower willingness to pay for clearing services The foreclosure strategy is without costs: Is it clear that there is an incentive to foreclose Euroclear?

Bonds: Market Definition Most trades are ”uncleared” Reasons for trading uncleared*: “CCPs tend to specialise in particular products or asset classes. Use of CCPs therefore reduces the scope for netting across products, which institutions are currently able to do on a bilateral basis….” “The initial margins or haircuts imposed by CCPs are very high compared to current market practice, and the remuneration of cash margin paid to members is low. Consequently, CCPs are expensive to use…” “CCPs may not be suitable for all types of market user. The access criteria and cost represent barriers to entry for smaller firms. Netting is only cost-effective for institutions with two-way flows of business…” * Source: International Capital Market Association (ICMA)

Bonds: Market Definition SSNIP question in the market test: Low numbers, high fraction of ”other” answers To what extent do customers split their trades?