Deutsche's exchange plans hit by calls for full inquiry

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Deutsche Börse's attempt to break up the merger between the New York Stock Exchange and French rival Euronext suffered a fresh blow yesterday after another influential City body called on European competition watchdogs to launch a full-scale inquiry.

Deutsche's proposals would put Liffe, the London Futures Exchange, together with Deutsche's Eurex, in effect creating a single and dominant European derivatives exchange.

The Futures & Options Association (FOA), which represents more than 100 users of the exchange, said a merger could have a damaging impact on trading, products, pricing and clearing.

In a letter to the European Commission it said: "It is our view that the prima facie dominance that could be generated by the proposed merger, [and] the potential impact on the EU's financial services sector ... call for an in-depth investigation."

This makes a competition investigation a near certainty because the EC's competition watchdogs will act if users raise objections to the plans.

The stockbrokers lobby group Apcims has already called on the City to push for an inquiry, and expressed fears that such a merger could be deeply damaging to London.

Hugh Freedberg, who runs Liffe, has warned that thousands of City jobs could be put at risk should Deutsche take over Euronext and merge the two derivatives exchanges. The FOA said it believed a merger could remove "one of the key competitive constraints on exchange fees".

It pointed to what happened when Eurex sought to take on the Chicago Board of Trade in the US. "They responded to the competitive threat by cutting their exchange fees by 75 per cent. However, once it was established that Eurex US was not going to be successful in prising liquidity away from the CBOT's key contracts the CBOT raised their fees close to previous levels."

The FOA also said technological innovation would be hindered by the reduction in competition a merger would bring and voiced concerns about the stranglehold that the single exchange would have on "key European benchmark products".

Euronext's preferred deal is with the NYSE, although the Americans are under pressure to sweeten the terms. However, influential hedge funds such as TCI have called on it to do a deal with Deutsche. A meeting to decide Euronext's future is to be held in December.