Germans ‘must make sacrifice’ to bag London Stock Exchange

By Stewart Fleming

Date: 13/01/05

Deutsche Börse, the leading German stock exchange, should be forced to sell its Clearstream clearing and settlement arm if it wants to take over the London Stock Exchange (LSE), according to its Brussels-based rival Euroclear.

Euroclear is warning of increased risks to the stability and efficiency of Europe's financial markets if Deutsche Börse is allowed to become the EU's dominant securities trading platform.

The £1.5 billion takeover battle for the LSE, which pits Deutsche Börse against Paris-based Euronext, is widely seen as a decisive moment for the development of efficient pan-European securities markets, which is one of the aims of the Lisbon Strategy for boosting the European Union's economic growth.

Of the two bidders for the LSE only Deutsche Börse is structured as a vertically integrated "silo" which trades, clears and settles deals under one roof.

A Deutsche Börse spokesman yesterday (12 January) rejected Euroclear's criticisms, saying that DB had already promised that it would honour existing clearing and settlement agreements that the LSE had and would not require LSE users to shift to DB-owned Clearstream.

"This is the beginning of the end-game for the trading of securities in the EU," said Graham Bishop, a leading securities market consultant. He said that whichever bid succeeded, before long both the Italian and Spanish stock exchanges would link up with the winner creating the dominant EU securities trading, clearing and settlement operation.

If DB did acquire the LSE it would significantly strengthen not only the company but also the city of Frankfurt as a financial centre. But the LSE battle is also raising public policy concerns which go beyond the battle over the price that Euronext or DB will have to pay to secure approval from the LSE's shareholders. Writing in the Financial Times this week, Sir Nigel Wicks, a former top British Treasury official and deputy chairman of Euroclear, asked whether the company which took over the LSE would "serve as an anchor for financial stability in a world of increasing complexity". Answering his own question he said that such would be the "systemic importance" of the new exchange once it had acquired the LSE, that consideration must be given to reducing those risks "perhaps by separating ownership of the exchange from any clearing and settlement functions".

Apart from concerns about increased risks to the financial system from such a vertically integrated exchange, DB's critics also argue that its ability to bundle trading, clearing and settlement together gives it increased pricing power at its users' expense. Wicks warned that users "will be wary about any requirement to transfer their clearing and settlement business away from a user-owned company (such as Euroclear) to a company that is also an exchange and has the goal of maximising shareholder value".

A DB spokesman denied that DB's pricing system lacked transparency.

The European Commission believes that policing of any takeover will be left to the national authorities, so it seems that it will be for the UK's Financial Services Authority to impose any conditions.

• Stewart Fleming is a Brussels-based freelance journalist.

Article says that the £1.5 billion takeover battle for the London Stock Exchange, between Deutsche Börse and Paris-based Euronext, is widely seen as a decisive moment for the development of efficient pan-European securities markets, which is one of the aims of the Lisbon Strategy for boosting the European Union's economic growth.

Brussels based competitor Euroclear suggested that Deutsche Börse, the leading German stock exchange, should be forced to sell its Clearstream clearing and settlement arm if it wanted to take over the London Stock Exchange (LSE).

Euroclear warned of increased risks to the stability and efficiency of Europe's financial markets if Deutsche Börse was allowed to become the EU's dominant securities trading platform.