Worries over European stock exchange giant

BRUSSELS -- In the United States the planned takeover of NYSE Euronext by Germany's Deutsche Boerse made waves because it means ceding the storied trading floor at 11 Wall Street to foreign control.

But in Europe, tradition has almost no role to play in reviews of the deal. Regulators are focused instead on how to handle a new company that would be the world's largest exchange.

The deal is shining a spotlight on the sector's transforming business model. Big exchanges are no longer just the venues for trading stocks and bonds, but have turned into one-stop conglomerates that clear and settle trades in derivatives, source and sell their own data and license the use of coveted indexes like DAX or Stoxx.

A financial behemoth

Continental European countries will be eager to use the deal to boost Frankfurt's status as a financial center and compete with New York, Hong Kong and London. But regulators are also worried that they'll create a financial behemoth just as they're trying to increase oversight of the sector in the wake of the 2008 global crisis.

The $10-billion takeover is set to affect big banks, investment funds and rival exchanges around the world, making it one of the biggest regulatory cases of 2011 for the EU's competition watchdog. The first deadline for the European Commission's review is Thursday, but the regulator is expected to launch an examination of potential competition threats that could drag on until the end of the year.

Few observers believe the commission will block the takeover outright, but many wonder how it will deal with two key issues: first, the creation of a potentially dominant venue for derivatives trading -- by combining Deutsche Boerse AG's Eurex and NYSE Euronext's Liffe. Second, the consequences of linking this huge derivatives exchange to Deutsche Boerse's integrated business model, in which trades are channeled to its own clearinghouse.

'Vertical silos'

Deutsche Boerse's integration of trading and clearing -- as well as a lucrative settlement bank and indexes business -- means it is involved in multiple aspects of a trade at the same time, streamlining a process whose profits are usually distributed among several companies.

The CME Group Inc. in the United States has done this, and other exchanges are working to build up their own so-called "vertical silos." But the takeover of NYSE Euronext would take that practice to a new level, extending it across the biggest exchange in the world.

"Are there a lot of monopolistic elements in this formation? Yes, there are," said Diego Perfumo, an exchange analyst at Equity Research Desk in Connecticut.

However, Perfumo says, the commission will have to look at the merger in a global context, where Europe wants to strengthen Frankfurt as a financial center in the eurozone that can successfully compete for listings from fast-growing Asia.