European Commission Opens “In Depth” Review of LSE/Refinitiv Deal

The European Commission (EC) has opened an in-depth investigation to assess the proposed $27 billion acquisition of Refinitiv by the London Stock Exchange Group (LSEG) under European Union Merger Regulation. The Commission says it is concerned that the proposed acquisition may reduce competition in trading and clearing of various financial instruments and in financial data products.

The Commission says its initial market investigation identified preliminary concerns in the electronic trading of European government bonds as it would combine 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 EC says. “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.”

The EC also highlights the trading and clearing of OTC interest-rate derivatives (IRDs) as an area of concern, observing that 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. The EC says 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 EC states. “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.”

A third area of concern cited concerns data and desktop solutions. The EC notes that 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, it continues, citing financial indices through FTSE Russell and security identifiers called SEDOLs. “These three types of data are significant inputs for data feeds and desktop services and there is often no alternative for LSEG’s offering,” the EC argues, adding, “The Commission has preliminary concerns that following the proposed transaction, competitors in consolidated real-time data feeds and desktop services could be shut out from accessing LSEG’s input data.”

A final concern expressed is over index licencing, the EC says that consolidated real-time data feeds and foreign exchange indices are significant inputs for index providers and Refinitiv is one of the largest suppliers for these products. Equally, 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,” it says..

Ensuing from these concerns, the EC 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, meaning it 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.

“Financial markets provide an essential function for the European economy,” says EC executive vice-president Margrethe Vestager, responsible for competition policy. “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.”

In a statement, LSEG says it “notes” the European Commission’s announcement confirming the commencement of Phase II proceedings in connection with its review of the transaction. “LSEG continues to engage constructively with the European Commission and notes that the Phase II review will enable the European Commission to consider the transaction in further detail, as would be expected for a global transaction of this nature.

“LSEG has received a number of antitrust and foreign investment approvals and continues to make progress in relation to the remaining clearances and approvals upon which the transaction is also conditional,” it adds. “We remain committed to closing the transaction in 2020.”

Colin Lambert

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