EC investigates LSEG-Refinitiv deal amid competition shrinkage concerns
The European Commission on Monday announced the opening of an in-depth investigation upon the proposed acquisition of global financial data provider Refinitiv by the London Stock Exchange Group (“LSEG”) from a Blackstone-led consortium for $27bn (€24bn), under the EU Merger Regulation. The instance, which had been notified the transaction on 13 May, will take a decision before 27 October 2020 and recalled that the opening of an in-depth inquiry does not prejudge the final result of the investigation.
In a statement, the Commission expressed concerns as to the transaction, that LSEG wants to seal in the second half of 2020, may reduce competition in trading and clearing of various financial instruments and in financial data products. On the one hand, LSEG operates various trading venues including the Italian stock exchange Borsa Italiana, provides a number of settlement and custody services as well as financial indices and data, and runs the London Clearing House as well as the Italian clearing house Cassa di Compensazione e Garanzia. On the other hand, New York-headquartered Refinitiv provides consolidated real-time and non-real time datafeeds to more than 40,000 institutions in 190 countries, foreign exchange indices. It also has its hands over several electronic trading venues in various asset classes.
According to executive vice-president Margrethe Vestager, responsible for competition policy, “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.”
Four areas of concerns
In its statement announcing the launch of the investigation, the Commission outlined four concerns. The EU body first worries about the impact of the transaction on the electronic trading of European govies. The LSEG-Refinitiv deal “would result in a very large combined market share in the electronic trading of European government bonds” given that the deal seeks to combine major trading venues, including LSEG's MTS and Refinitiv's Tradeweb, where electronic trading of bonds of the European Economic Area (EEA), UK, and Swiss governments takes place. For the European Commission, “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 second concern raised by the European Commission relates to trading and clearing of over-the-counter interest-rate derivatives (“OTC IRDs”). Again, the EU body suggests that the combined LSEG-Refinitiv would showcase “significant market power“ in both derivatives trading and clearing.
“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,” the European Commission argued.
Following the deal, competitors in consolidated real-time datafeeds and desktop services could be shut out from accessing LSEG's input data.
The EU body is also concerned that in the aftermath of the deal, competitors in consolidated real-time datafeeds and desktop services “could be shut out from accessing LSEG's input data.” Different types of data are commercialised to external market players by Refinitiv (financial data from various sources) and LSEG (trading data from its venues, financial indices and security identifiers). In the case of LSEG's offering, the European Commission said there is often no alternative.
The EU institution's fourth concern dwells in index licensing. Both Refinitiv and LSEG provide meaningful indices to markets. The former offers foreign exchange indices that benefit from its real-time datafeeds. The latter, through FTSE Russell, is one of the leading financial indices providers in the region 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.”