A bid by the New York Stock Exchange for its London rival could be derailed by US regulators, lawyers close to the bid battle have found.
Two weeks ago, John Thain, chief executive of the NYSE, said: "We want to play a leadership role in any [European stock exchange] consolidation process". This sent London Stock Exchange shares soaring to unprecedented highs, reaching 778p last week.
This compares with the 580p a share offered by Australian bank Macquarie, the only one of the LSE's suitors actually to have tabled a bid.
An approach by Deutsche Börse last year was derailed by its shareholders, while the two hedge funds that own large stakes in Euronext, the Franco-Dutch exchange group, have opposed its interest in the LSE.
Competition regulators said last week that Euronext would have to slash its stake in clearing and settlement business LCH Clearnet if it were to buy the LSE.
Euronext is mulling over whether this would make a deal worthwhile. In the meantime, merger talks between it and Deutsche Börse have stalled.
Analysts see the NYSE as the only likely rival to Macquarie given that its US rival, Nasdaq, gave up on a previous attempt to merge with the LSE.
However, a confidential report, drawn up by a law firm close to the bidding process, casts serious doubts on any bid.
It points out that American law would require the US Securities and Exchange Commission to extend its regulatory reach to the London market if the NYSE bought the LSE.
This would involve UK-listed companies having to announce results quarterly, make reports to the SEC and, potentially, comply with the Sarbanes-Oxley rules that govern US companies.
European groups with US listings have complained that these rules add massively to their costs. Companies like ITV and 0 2 have dropped their listings on the NYSE and scores of others are trying to follow.
This extra regulatory burden would harm the LSE's competitive advantage, which has seen it attract groups from Russia, China and Africa to list in London.
In addition, brokers trading on the LSE would have to comply with US regulations. This would be a disadvantage to firms that do not have big US operations - typically, smaller brokers.
The SEC's increased role would also cause friction with the UK's Financial Services Authority. Its "principles-based" regulatory approach is at odds with the SEC's "rules-based" method.
The report concludes that to avoid this "Americanisation" of regulation, the NYSE would have to avoid integrating with the LSE, so losing many of the benefits of a merger.
The NYSE has declined to comment further on its intentions for the LSE.Reuse content