The European Commission has opened an in-depth investigation to assess the proposed acquisition of Refinitiv by the London Stock Exchange Group (“LSEG”) under the EU Merger Regulation. The Commission is concerned that the proposed acquisition may reduce competition in trading and clearing of various financial instruments and in financial data products.
Executive Vice-President Margrethe Vestager, responsible for competition policy, said: “Financial markets provide an essential function for the European economy. Access to financial market infrastructure and financial data products is needed to make investment decisions, trade, and to protect savings. We have opened an in-depth investigation to assess whether the proposed transaction which will combine the activities of LSEG and Refinitiv would negatively affect competition in these markets. It is key for a well functioning financial market to ensure that market participants continue to have access to financial market infrastructure and financial data products on competitive terms.“
The proposed acquisition would combine the activities of LSEG and Refinitiv. LSEG operates trading venues (e.g. through MTS) and clearing houses. It also offers financial data products, such as trading data from the London Stock Exchange and the FTSE100 equity index. Refinitiv offers financial data products, such as desktop services and datafeeds. Refinitiv also controls Tradeweb, which operates electronic trading venues for many financial instruments.
The Commission's preliminary concerns
The Commission's initial market investigation identified preliminary concerns in the following markets:
(a) Electronic trading of European Government Bonds – Horizontal concerns
The proposed transactioncombines major trading venues where electronic trading of bonds of the European Economic Area (EEA), UK, and Swiss governments takes place. These venues include LSEG's MTS and Refinitiv's Tradeweb. This would result in a very large combined market share in the electronic trading of European Government Bonds The market investigation indicates that the parties own venues with a leading position in the market, and are close competitors in this space, in particular regarding trading between dealers and investors. The market investigation also suggests that it is difficult for a new trading venue to attract clients in sufficient numbers and become a real alternative to incumbent venues.
(b)Trading and clearing of Interest-Rate Derivatives – Vertical concerns
Regarding the trading and clearing of over-the-counter interest-rate derivatives (“OTC IRDs”), the proposed transaction would lead to a combined entity with significant market power both upstream (trading) and downstream (clearing).
OTC IRDs constitute the largest category of derivatives globally. They are important not only for investors but also for companies needing to hedge interest rate risks associated with cash flows and payment obligations. The attractiveness of both trading venues and clearing houses in OTC IRDs increase with the number of clients using their services (so-called “network effects”). The preliminary investigation shows that barriers to entry are high and customers rarely switch trading venues or clearing houses. The Commission will also investigate further the competitive dynamics in trading and clearing of exchange-traded funds and foreign exchange instruments.
(c) Consolidated real-time datafeeds and desktop solutions – Vertical concerns
Refinitiv aggregates financial data from different sources and offers it in packages to traders, asset managers and other data users, in the form of consolidated real-time datafeeds (which transmit data from computer to computer) or desktop services (which provide on-screen display of data). LSEG commercialises trading data generated on its venues; financial indices through FTSE Russell; and security identifiers called SEDOLs. These three types of data are significant inputs for datafeeds and desktop services and there is often no alternative for LSEG's offering.
The Commission has preliminary concerns that following the proposed transaction, competitors in consolidated real-time datafeeds and desktop services could be shut out from accessing LSEG's input data.
(d)Index Licensing – Vertical concerns
In addition, Refinitiv offers foreign exchange indices. Consolidated real-time datafeeds and foreign exchange indices are significant inputs for index providers and Refinitiv is one of the largest suppliers for these products.
LSEG's FTSE Russell is a major provider of financial indices in the EEA and globally. The Commission has preliminary concerns that following the proposed transaction, competitors in index licensing could be shut out from accessing Refinitiv's necessary input data.
The Commission will now carry out an in-depth investigation into the effects of the transaction to determine whether its initial competition concerns are confirmed.
The transaction was notified to the Commission on 13 May 2020. The Commission now has 90 working days, until 27 October 2020, to take a decision. The opening of an in-depth inquiry does not prejudge the final result of the investigation.
Companies and products
London Stock Exchange Group, headquartered in London (UK) is one of Europe's pre-eminent financial infrastructure companies, best known for operating the London Stock Exchange. It also owns Borsa Italiana, the Italian stock exchange, and operates a number of other trading platforms for trading of stocks, other equity-like exchange traded products, bonds and derivatives. LSEG is also active in the post-trading space, most notably in clearing through the London Clearing House ("LCH") including LCH SwapClear, and the Italian clearing house Cassa di Compensazione e Garanzia ("CC&G"). LSEG also offers settlement and custody services as well as indices, data, and other information products.
Refinitiv, headquartered in New York City (US) is one of the main providers of financial markets data and infrastructure, serving over 40,000 institutions in 190 countries. Refinitiv offers consolidated real-time datafeeds through its product Elektron, desktop solutions through its product Eikon (being rebranded as Refinitiv Workspace) as well as non-real time datafeeds and discrete content sets. It is active in indices predominantly in the foreign exchange benchmarks segment, where it provides its flagship WM/Reuters FX benchmark. Refinitiv also controls several electronic trading venues in various asset classes.
Merger control rules and procedures
The Commission has the duty to assess mergers and acquisitions involving companies with a turnover above certain thresholds (see Article 1 of the Merger Regulation) and to prevent concentrations that would significantly impede effective competition in the EEA or any substantial part of it.
The vast majority of notified mergers do not pose competition problems and are cleared after a routine review. From the moment a transaction is notified, the Commission generally has 25 working days to decide whether to grant approval (Phase I) or to start an in-depth investigation (Phase II).
In addition to the current transaction, there are six ongoing Phase II merger investigations: the proposed acquisition of GrandVision by EssilorLuxottica, the proposed acquisition of DSME by HHIH, the proposed acquisition of Chantiers de l'Atlantique by Fincantieri, the proposed acquisition of Lotos by PKN Orlen, the proposed acquisition of Transat by Air Canada and the proposed merger of PSA and FCA.
More information will be available on the Commission's competition website, in the public case register under the case number M.9564.