05 March 2017

Financial Times: Broken engagement at the LSE is bad for the UK

[...]After Brexit, German regulators and politicians began to push back on the €29bn merger. The tie-up was pitched as a merger of equals, with Deutsche Börse’s chief, Carsten Kengeter, to lead the combined company, with the holding company to be set up in London.

It was the last bit that the German authorities began to bristle at. “In view of the approaching Brexit, I think it would be a mistake to locate the . . . headquarters in London” one politician opined. To endanger a merger of modern exchange businesses over the location of the nominal headquarters is profoundly wrong-headed, for the simple reason that the location does not matter. What matters is technology, scale and common regulatory framework.

There may also have been pressure on the deal from more familiar corporate sources. Companies and their executives have pride, and when one side starts fiddling with agreed conditions, the other responds. The nominal barrier to the deal is a demand from European competition regulators that LSE sell its majority stake in MTS, a relatively small Italian bond-trading platform. The LSE is resisting the divestment. From the outside, it looks very much like this matter could be negotiated if other issues had not increased tensions between the two groups.

Whatever the explanation, it would be a shame if the deal fell through. Europe’s capital markets are very fragmented, with LSE, Deutsche Börse, Intercontinental Exchange, Euronext, Euroclear and others all taking a part of the business. More unity, both in exchanges and in regulation, would reduce friction and cost. Linking Germany’s muscular corporate sector with the deep pools of capital available in London simply makes sense. If Europe’s markets remain fragmented, the long-term result will be that capital markets in the US and Asia will attract more global business, leaving Europe and the UK behind.

The deal is also breaking down at a time when London’s finance industry, a crucial source of jobs and tax revenue, is doing all it can to maintain its deep and profitable connections to Europe as the UK leaves the common market. Common financial plumbing could have been a fact on the ground that increased the reasons for a deal that worked on both sides of the channel. Some opponents of the deal worry about systemic risk posed by combining clearinghouses. But a market failure big enough to bring down one of the two would very likely have spread to the other. The risks posed by big, deep markets can be managed. Their advantages are very hard to replicate. 

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