Derivatives Market Share At Risk As ICE Prods For Speedier Review Of NYSE Euronext Deal

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    Quick Take 

  • The IntercontinentalExchange has filed a request with the SEC to form a new holding company, called the ICE Group. The holding company will now acquire NYSE Euronext
  • The firm has also asked the European Union to review its merger plans in order to avoid separate probes in three different European countries
  • Meanwhile the CME Group has launched OTC interest rate swap clearing in Europe
  • If the ICE-NYSE Euronext merger take more time in acquiring regulatory approvals, we can expect competitors like the CME group to gain ground in capturing the growing OTC derivatives business

The race among exchanges to capture the centralised OTC clearing market is heating up. While the CME Group (NYSE: CME) has started clearing OTC interest rate swaps in Europe this month, IntercontinentalExchange (NYSE:ICE) is trying to catch up by speeding up its merger with NYSE Euronext (NYSE:NYX).

Bloomberg reported last week that IntercontinentalExchange has requested that the European Union review its acquisition of NYSE Euronext so that it can avoid separate investigations of the same in Britain, Spain and Portugal. The separate investigations can take more time than a single review by the EU. These countries now have only 15 working days to object to the EU taking over the review of ICE-NYSE merger deal. [1]

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We mentioned in an article last month that the European authorities could take upto 105 working days from the date of initiation of regulatory proceeding to come out with a clear verdict on the deal. With this request, ICE seems to be trying to reduce that time.

The firm has also modified its merger agreement with NYSE Euronext. Under the new agreement, ICE is to form a new holding company called the ICE Group, which will acquire NYSE Euronext. Both NYSE Euronext and ICE will then operate as subsidiaries of the ICE Group. The formation of a holding company is supposed “to facilitate the implementation of the governance provisions that will be required to be put into effect in connection with the transaction,” according to the company’s regulatory filings. [2] In simple terms it means that the formation of a holding company will allow them to avoid some regulatory roadblocks.

A Delay In Getting Regulatory Approval Will Put ICE-NYSE At A Disadvantage

Companies typically do not ask the EU to overtake review of M&A deals unless they are sure that the national regulatory bodies will not object to it. However, it is never certain. Last year, the authorities in Britain objected to and blocked a similar appeal during London Stock Exchange’s acquisition of LCH.Clearnet. If a similar situtation were to arise, the deal between ICE and NYSE Euronext could take longer to materialize.

That would mean a delay in the company’s eventual move into the OTC derivatives space in Europe as the managements of the two companies are currently focused on completing the deal. Meanwhile, competitors are gaining ground in attracting the OTC interest rate swap participants. The CME Group has already started operations in Europe on March 18th — almost a week after the first deadline for clearing OTC interest rate swaps expired on March 11 in the U.S. This is almost certainly going to help CME gain a stronger position in the market.

As noted in one of our earlier articles on the CME Group, the derivatives exchange is already registering a significant growth in open interest for OTC interest rate swaps. The open interest in these products traded on CME’s platform increased 16% in the first 15 days of March, from $873.29 billion to $1,013.8 trillion.((OTC IRS Market Data, CME Group))

This lead is likely to increase if the NYSE-ICE merger deal takes more time as CME continues to attract more swap participants onto its platform.

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Notes:
  1. ICE Asks EU to Take NYSE Euronext Deal to Avoid Multiple Probes, Bloomberg, March 21, 2013 []
  2. REQUEST FOR WITHDRAWAL, SEC Filings, March 20, 2013 []