Germans reject ‘merger of equals’: Deutsche Boerse sparks fury and insists “LSE must be based in Frankfurt”

When is a merger of equals not a merger of equals?

Britain’s most prestigious traditional executing venue, London Stock Exchange, has been the subject of a very high profile tug of war between parties from mainland Europe, North America and British politicians during recent weeks, as discussions regarding its proposed merger with Germany’s Deutsche Boerse have advanced.

What was intended by Europhile London Stock Exchange CEO Xavier Rolet as a £21 billion ‘merger of equals’ is indeed becoming quite the opposite.

As was perhaps to be expected, Germany’s politicians have waited patiently whilst the merger proposal took further shape, before putting pressure on Deutsche Boerse to ensure that the London Stock Exchange abandons its promises and bases the institution’s head office in Frankfurt.

One of the world’s longest-established exchanges, with a 215-year history in the world’s largest financial center, the London Stock Exchange is a powerhouse among the global giants of the Square Mile.

Today, Germany’s push toward a relocation of the head operations to Frankfurt has emerged, making the proposed merger the potential subject of reporting of the post-merger group’s profits in Euros, with Deutsche Boerse CEO Carsten Kengeter becoming the head of the entire operations.

In this case, shareholders of Deutsche Boerse would have a 54.5% stake in London Stock Exchange, making it more of an acquisition by Frankfurt’s main venue than an actual all-share merger, and that senior executives had previously stated that the new post-merger group would be based in London as a smoke screen in order to fend off pre-merger claims that the executives are acting against Britain’s national interest, especially in the advent of Britain’s potential exit from the European Union.

Manfred Zass, a former Deutsche Boerse director, has warned the proposals could damage Frankfurt’s standing as it aspires to become a rival financial centre to the City, and several German politicians claim it is vital the company is based on the Continent – particularly if Britain dares to vote to leave the EU.

Ulrich Caspar, a member of the state parliament in Eupe has stated

“It’s a problem if the headquarters of the holding company will be outside the eurozone and, if Brexit happens, outside the European Union.”

His colleague Clemens Reif told the Financial Times that a victory for the ‘Leave’ campaign in the referendum on June 23 would mean London would cease to be “an international financial centre” and become “a city whose significance worldwide will be declining.”

British politicians reacted with fury to the remarks. Sir Bill Cash, a leading Eurosceptic and Tory MP, said: “The Germans want to run not only the eurozone but also the EU as a whole. There is no limit to their desire to take over institutions like the stock exchange. Frankfurt has never shown any capacity for the flexibility and entrepreneurship which the London Stock Exchange represents.”

Discourse from within the British ranks has also been displayed with regard to the proposed merger, last month Lord Myners spoke his mind very clearly on the matter.

Lord Myners, who served as Financial Services Secretary to the Treasury between October 2008 and May 2010 under the Labor government of the time and has several senior executive positions behind him which were within large institutions including NatWest and RBS, as well as Lord Rothschild’s RIT Capital Partners where he serves as a board member since August 2010, has a vested interest in the merger, as he was appointed Chair of Governors at the London Stock Exchange in 2014.

In particular, Lord Myners, along with senior regulators in London, have concerns relating to how clearing operations can be expanded across both exchanges.

According to laws in America and Europe, notably the Dodd-Frank Wall Street Reform Act and the EMIR (European Market Infrastructure Regulation), exchange-traded swap contracts must be cleared through specific electronic clearing houses, a process which engenders greater transparency and in the case of London Stock Exchange, its own subsidiary LCH.Clearnet is used for this purpose.

The case in point here is that nowadays, with large banks better capitalized, transactions are now being passed to institutions with very little capital at all therefore if large trades went wrong, there could be massive exposure, and as a result, a question mark hangs over the corporate governance of a new entity consisting of the London Stock Exchange and Deutsche Boerse with its head offices in two separate countries, which could lead to a shirking of responsibilities by British and European regulators, or a degree of buck-passing. Counterparty risk is, after all, a very important subject post SNB EURCHF peg removal.

Should the London Stock Exchange proceed on these proposed terms, it could well signal the end for one of London’s most famed and longstanding institutions, and hand control of the venue which lists many of the world’s blue chip stock, to mainland Europe.