Proposed acquisition by Euronext NV of LIFFE Holdings plc

No. ME/1606/01

A report under section 125(4) of the Fair Trading Act 1973 on the advice given on 13 December 2001 to the Secretary of State for Trade and Industry under section 76 of the Act

The parties

Euronext NV comprises the merged derivative exchanges of Paris, Brussels and Amsterdam. In the year ended December 2000, Euronext reported pre-tax profits of £126m on turnover of £451m and gross assets of £2,015m.

LIFFE Holdings plc is the London-based derivative exchange. In the year ended December 2000, LIFFE reported pre-tax profits of £8m on turnover of £89m and gross assets of £142m.

Assessment

The merger satisfies both the assets test of the Fair Trading Act, and the share of supply test in respect of the supply of derivative exchange services. Derivatives are financial instruments traded on financial markets, either on exchanges or over the counter (OTC). They are generally either futures (representing the right to buy or sell a standard quantity and quality of an asset or security at a specified date and price), or options (representing the right – but not the obligation – to buy or sell a security or other asset during a given time for a specified price).

This case has been analysed in terms of both short-term and long-term competition. In the short term, exchanges tend to specialise in certain product areas. Liquidity for each product tends to be concentrated on one exchange, and therefore exchanges do not always compete directly with each other. Although some customers substitute between products, each product has different characteristics and is traded in different situations. For the purposes of short-term competition, five separate products have been considered. These, as described by the parties to this merger, are: single stock; equity indices; capital (medium- to long-term interest rates); money (short-term interest rates); and commodities. The parties do not have a great deal of overlap in any of the major derivatives product areas. In addition, it is clear that OTC trading provides some degree of competitive constraint on exchanges, in terms of both prices and services.

In the long term, exchanges compete with each other in terms of innovation, rules, cost reductions and other services. The relevant product market in the longer term is thus the supply of derivative exchange services. The transaction will result in the merger of the second and third largest European derivative exchanges. However, Eurex will remain the largest European derivative exchange, almost twice the size of the merged entity. Given the current portfolios of LIFFE and Euronext, customers wishing to migrate from them are most likely to move to Eurex. No major contracts have moved between LIFFE and Euronext over the past five years, indicating that it is unlikely that there would be a material loss of competition resulting from the merger. In addition, a combined LIFFE/Euronext may engender greater rivalry with Eurex, providing the impetus for both exchanges to innovate, and others to imitate.

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

Back to top