Proposed acquisition by Deutsche Börse AG of Cedel International SA

No. ME/1204/02

A report under section 125(4) Fair Trading Act 1973 on the advice given on 27 May 2002 to the Secretary of State for Trade and Industry under section 76 of the Act.

PARTIES

Deutsche Börse AG (DB) is principally active in the organisation of Stock Exchange trading and related services for market participants. These services include trading in cash and derivatives, clearing house and central counter party clearing, market information processing and marketing, and the operation and design of market infrastructure and technology. In the year to 31 December 2001, DB reported pre-tax profits of approximately £199.4m (319.2m Euros) on turnover of approximately £475m (760.3m Euros), and total assets of approximately £1,333.5m (2,135m Euros).

Cedel International SA (Cedel) is a Luxembourg company which acts solely as a holding entity administering the 50 per cent share holding in Clearstream International SA (Clearstream) on behalf of its members. In the year to 31 December 2001, Cedel reported pre-tax profits of approximately £27.7m (44.5m Euros) on turnover of approximately £41.2m (66m Euros), and total assets of approximately £369.8m (592m Euros).

Clearstream and its subsidiaries provide clearing, settlement and custody services for securities. In the year to 31 December 2000, Clearstream reported pre-tax profits of approximately £133.9m (214.4m Euros) on turnover of approximately £637.9m (1,021.3m Euros), and total assets of approximately £3,453.1m (5,528.5m Euros).

JURISDICTION

The merger satisfies the assets test under the Fair Trading Act 1973 – the world wide assets of Cedel at 31 December 2001 were approximately £369.8m. The ECMR does not apply.

ASSESSMENT AND RECOMMENDATION

There are three relevant markets – the market for custody and management services (CMS), the market for clearing and settlement (C&S) and the upstream market for exchanges. Barriers to entry in all three markets are high due to significant set up costs and minimum scale efficiencies, although competitive pressure in each of these markets appears to be strong, along with buyer power. The merger raises no horizontal issues as DB and Clearstream do not overlap horizontally in any market.

The markets for CMS and C&S can be further sub-divided into national and international trades. For international trades, International Central Securities Depositories (ICSDs) compete with global custodian banks to provide services for investors in both exchange traded and over-the-counter (OTC) financial transactions. For historical reasons, the two existing ICSDs, Clearstream and Euroclear, tend to specialise in bonds (mainly traded OTC), while the global custodian banks tend to specialise in equities (mainly traded on an exchange).

Issues arising from vertical integration have been considered. First, the possibility of cross-subsidisation in one of three directions: DB subsidising Clearstream; Clearstream subsidising DB; or Clearstream Banking AG (CB) in Frankfurt (the German domestic Central Securities Depository, or CSD) subsidising Clearstream Luxembourg (the ICSD).

The parties have little incentive to engage in cross-subsidisation in any direction. Price (i.e. clearing and settlement fees and transaction fees) is only one small element in the decision as to which C&S services to use and which exchange to trade on. Cross-subsidisation is therefore unlikely to be a profitable strategy.

DB is also unlikely to be able to restrict the choice of which clearing and settlement platform an investor could use when trading on one of DB's exchanges.

The merger may increase DB's incentives to ensure that domestic transactions are cleared exclusively by CB. However, given that this is a German domestic issue, it has not been analysed in any detail here. Finally, there is a possibility that DB might be able to restrict membership of CB. However, DB has little incentive to restrict access to CB as this might prompt harmful retaliation from other systems.

The Financial Services Authority and other third parties raised no substantive competition concerns regarding the merger.

On these grounds we recommend that the proposed merger is not referred to the Competition Commission.

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