Some Issues on Cross-Border Stock Exchange Mergers
University of Pennsylvania Journal of International Law
BY IOANNIS KOKKORIS 0
RODRIGO OLIVARES-CAMINAL 0
0 . Principal Case Officer at the Office of Fair Trading (UK), Visiting Lecturer at City University (UK), and Visiting Fellow at the University of Durham (UK). The is
Globalization,internationalization,integration, deregulation, as well as technologicaladvances have provided the impetus for mergers of stock exchanges to facilitate cross-border listings and trading. Cross-border mergers triggera series of different issues to be analyzed. The focus of our analysis will be on regulatory and competition law issues arisingfrom cross-borderstock exchange mergers. From a competition law standpoint,stock exchange mergers may have a severe impact on the competition among stock exchanges and thus lead to higherfees or lower quality of service. The focus will be on horizontal issues arisingfrom such mergers. Thus, this Article will provide an analysis of the following issues: (1) the provision of primary listing services to domestic companies; (2) the provision of secondary listing services and primarylisting services to companies seeking listings outside their domestic market; (3) the provision of on-book equities trading services; (4) markets for bonds and derivatives trading; and (5) markets for information services as well as information technology services. Some permutations of cross-border stock exchange mergers may induce competitive harm that leads to a post-merger market characterized by a lower degree of competition, and thus a lower degree of innovation and improvement in exchange services. The burdenfalls on competition authorities to ensure that effective and sufficient competition remains after any consolidationin the stock exchange industry. It should be emphasized that sound and effective regulation is the key to the development and integration of stock exchanges in the global market. Effective regulationwill provide confidence and attractinvestors,
allowing stock exchanges to grow and interact. However, there is no
single regulation structure that will be suitable to all countries.
Globalization, internationalization, integration, deregulation,
and technological advances have led to legislative changes such as
the Investment Services Directive ("ISD")1 and its successor, the
Markets in Financial Instruments Directive ("MiFID"),2 which aim
at the harmonization of regulation and have led to the creation of a
new regulatory environment for capital markets in Europe.
This trend has increased the number of international investors
in the European capital markets and has provided impetus to
mergers of stock exchanges as a means of facilitating cross-border
listings and trading. Stock markets across the globe have been the
subject of merger discussions following pressure to cut costs and
become more competitive. Besides the New York Stock Exchange's
("NYSE") acquisition of Euronext, which operates exchanges in
Paris, Amsterdam, Brussels, and Lisbon, the London Stock
Exchange ("LSE") has been the subject of constant speculation
since Deutsche B6rse AG launched a £1.35 billion takeover bid in
December 2004. Further approaches or interest from Euronext NV,
the NYSE Group Inc., Australia's Macquarie Bank Ltd., and
National Association of Securities Dealers Automated Quotation
System ("Nasdaq") have sent the value of the LSE rocketing. LSE's
1 Council Directive 93/22, On Investment Services in the Securities Field,
1993 O.J. (L 141) 27 [hereinafter Investment Services Directive]. The Investment
Services Directive set the legislative framework for investment firms and
securities markets in the European Union ("EU"), providing for a single passport
for investment services, thus enabling investment firms to operate throughout the
EU. The ISD has been repealed by the Markets in Financial Instruments Directive
of the European Parliament and the Council of April 21, 2004. Parliament and
Council Directive 2004/39, art. 69, On Markets in Financial Instruments, 2004 O.J.
(L 145) 1, 39 [hereinafter Markets in Financial Instruments Directive].
2 Markets in Financial Instruments Directive, supra note 1. The MiFID was
adopted in the EU in April 2004, and its implementing measures were adopted in
August 2006. Press Release, European Union, Investment Services: Final
Adoption of Directive is Boost for Investment Firms and Their Clients (Apr. 27,
2004) (available at http://europa.eu/rapid/pressReleasesAction.do?reference
=IP/04/546). EU member states were to incorporate the MiFID and its
implementing measures into domestic legislation and rules by January 31, 2007.
The legislation and rules must have been in effect by November 1, 2007. Press
Release, European Union, Investment Services: Entry into Force of MiFID a Boon
for Financial Markets and Investor Protection (Oct. 29, 2007) (available at
shares more than tripled from 414 pence even before the Deutsche
Borse approach. On June 22, 2007, the LSE agreed in principle to
acquire Borsa Italiana in an all-paper transaction valued at about
E1.6 billion (£1.1 billion).
More recently, nearly 50 percent of the LSE went to the hands
of two rival Gulf states battling to be their region's leader in the
global consolidation of exchanges. Qatar Investment Authority
and Borse Dubai now own 48 percent of the LSE following a
complex series of deals in which ownership of Europe's exchanges
is being realigned. Borse Dubai secured 28 percent of the LSE as
part of a wider deal with the U.S.-based Nasdaq designed to settle
their long-running battle for control of the Nordic exchanges and
technology operator OMX. The Dubai group bought most of
Nasdaq's 31 percent stake in the LSE for £14.40 per share in cash.
In return, it will take a 19.9 percent stake in the combined
Nasdaq/OMX group and receive cash.3 This strategic alliance
aims to forge the first global exchange platform, linking the ever
elusive "pools of liquidity" in the United States, Europe, and the
In addition, within the United States, Nasdaq has agreed to
acquire the Boston Stock Exchange ("BSE"), bolstering its clearing
capabilities and position in the "dark pools" business as
consolidation among exchanges continues. Included in the $61
million deal are the BSE's holding company, BSE Group, Boston
Stock Exchange Clearing Corporation, and BSE's regulatory
authority over the Boston Options Exchange.
The ISD, effective since January 1996, was the legislative
centerpiece of the single market program for the securities domain.
According to the ISD, each recognized exchange is automatically
accepted in other European Union ("EU") countries and offers
remote access to intermediaries in other EU countries without
imposing further regulatory burdens. In addition, ISD promoted
remote membership and price disclosure. 4
The EU's Financial Services Action Plan ("FSAP") -a
3 Norma Cohen, LSE Faces Fresh Bidding War, FIN. TIMES, Sept. 20, 2007,
available at http:/ /www.ft.com/cms/s/0/4c84fOee-674b-lldc-9443-0000779fd2ac
.html (noting how Qatar Investment Authority and Borse Dubai now own nearly
half of the London Stock Exchange).
4 See European Commission, FinancialSErvices:Implementing the Frameworkfor
FinancialMarkets: Action Plan, COM (1999) 232 final (May 11, 1999) (detailing the
Framework for Action program that the European Commission will pursue in its
efforts to reach a "single financial market").
comprehensive 42-measure5 plan to harmonize member states
rules with the aim of streamlining the integration of the EU
markets -highlighted the need to update the ISD. Moreover, in
2000, the European Council set up the Committee of Wise Men on
the Regulation of European Securities Markets to analyze and
come up with recommendations on the law-making process
concerning securities markets regulation in the EU, aiming both to
expedite the process and increase its flexibility in order to
incorporate market developments. In 2001, the final report by the
Committee of Wise Men on the Regulation of European Securities
Markets -commonly known as the Lamfalussy Report-was
published, 6 and some of its recommendations were adopted by the
European Council. 7
The ISD has been superseded by the MiFID, which will
introduce a single market and regulatory regime for investment
services in the EU. The objectives of MiFID are to complete the EU
single market for investment services and to respond to changes in
the securities markets by means of basic high-level provisions
governing the organization and conduct of business requirements
that should apply to financial services firms.8
5 These are mainly EU directives to be adopted prior to 2005. By the end of
2004, almost all of these measures had already been adopted. See EUROPEAN
COMMISSION, WORKSHOP ON METHODOLOGY FOR THE FSAP EVALUATION: FSAP
EVOLUTION CHART (
), available at http://ec.europa.eu/intemal market/
finances/ docs/actionplan/ index/061003_measures.en.pdf (listing the FSAP
measures planned and taken by the European Commission).
6 The final report was published on February 15, 2001. For a complete
version of the report, see Lamfulussy Report, http://ec.europa.eu/intemal
7 See Press Release, European Union, Results of the Council of Economics and
Finance Ministers, 22 March 2001, Stockholm Securities Legislation (Mar. 23,
2001), (available at http://europa.eu/rapid/pressReleasesAction.do?reference
=MEMO/01/105) (noting how the procedures discussed in the draft resolution
would carry out ideas presented in the final report of the Committee of Wise Men
on European Securities).
8 The key features of MiFID can be summarized as: (
) retaining the
"passport" principle contained in the ISD broadening the scope of "core"
investment services; (
) introducing the concept of "maximum harmonization,"
which focuses on "home" state supervision in lieu of "minimum
harmonization/mutual recognition," which was the previous applicable criterion;
(3) abandoning by certain EU member states of the so-called "concentration rule,"
which obliges firms to route all client orders through regulated exchanges; (4)
including new pre- and post-trade transparency requirements for equity markets;
(5) putting in place a more extensive transaction reporting requirement; and (6)
most firms falling under the scope of the MiFID will have to comply with the
Capital Requirements Directive. See, e.g., Parliament and Council Directive
European stock exchanges are turning into publicly-listed
organizations following demutualization and aim at maximizing
profits for their stockholders. Exchanges are moving from an era
of monopolies to a new era marked by competition. According to
Clayton, Jorgensen, and Kavajecz, sixty new financial exchanges
were created between 1990 and 1999.9 Sofia Ramos identifies the
likely contributing factors as "economic freedom in taxes,
regulation and banking, and the existence of larger economies. In
contrast, technology shocks that increase communication links
reduce the likelihood of new exchanges being [physically]
established." 10 The new wave of economic communications
networks ("ECNs") "in the absence of regulatory barriers [renders]
industry entry much easier than ever, since technological advances
decrease the costs of setting up [a stock] exchange." 1
Several institutional changes were common in stock exchanges
in Europe in the last two decades. These changes included: (
several mergers and acquisitions, and (
) changes in the ownership
structures, trading systems, and number of quoted companies, as
well as the extension of trading hours. Stock exchanges have
merged with derivative exchanges (for example, Euronext and
LIFFE) and with settlement operators (for example, Deutsche Borse
and Clearstream). Mergers that focus on combining different
geographic markets aim at exploiting the economies of scale in
trading. Mergers that have combined different activities aim at
providing a more complete financial service to customers.
One of the main exchange reforms was the computerization of
trading. In 1977, the Toronto Stock Exchange "was the first
exchange to computerize its trade." 12 Most exchanges currently
operate electronic trading. The information system, order routing,
queuing and execution systems are automated. The greatest
advantage of electronic trading is its ability to promote
border trading. The introduction of computerized systems is an
important instrument for increasing competition among stock
exchanges because it decreases transaction costs and thus increases
liquidity. An analysis of international markets suggests that
expected savings in total costs from automated execution
technology are about 40 basis1 3 points.' 4
In addition, the number of listed companies has increased as an
ever-larger number of companies seek access to pools of capital
inside and outside their home country. Consequently, stock
exchanges have increased trading hours to exploit trading in
crossborder listed securities.
Cross-border mergers trigger a series of different issues to be
analyzed. From a transactional point of view, some of these
aspects include the synergies that a merger creates, the
complexities in achieving an optimal financial structure, and
protection of minority shareholders. From a regulatory standpoint,
there is an array of issues that should also be considered.
Regulatory issues can be internal (compliance with rules of the
stock exchange) or external (compliance with the regulatory
requirements of the competent regulatory body or bodies).
Regulatory issues can affect the parties involved in the stock
exchange or the stock exchange itself. Moreover, these issues can
be exteriorized at a national or international level. For example,
the LSE is subject to the UK Financial Services Authority and EU
directives, which include the MiFID and other directives such as
the Market Abuse Directive, 5 the Prospectus Directive, 16 the
Transparency Directive,' 7 and the Capital Adequacy Directive. 18 In
the same line of thinking, it can be argued that the NYSE abides by
its own rules, the regulations imposed by the U.S. Securities and
Exchange Commission ("SEC"), and state rules. Moreover,
following these examples, it can be stated that both the LSE and the
NYSE are subject to international soft law (e.g., International
Organisation of Securities Commissions ("IOSCO")19) and external
treaty obligations (e.g., the General Agreement on Tariffs and
Trade ("GATT")20 and the General Agreement on Trade in Services
("GATS") 21). In addition, stock exchanges may be faced with the
extraterritorial application of laws to their members as result of a
dual listings or a private placement sell.
First, we will provide an overview of general regulatory issues
affecting financial entities. Consequently, and since one of the first
steps to analyze from a regulatory perspective is the competition
law 22 implications 23 - since if there is a breach of competition laws
the whole merger might not take place -this will be the pillar of
our analysis. We understand that observation of competition laws,
from a broad perspective, can be understood as a regulatory issue.
As far as the competition aspect is concerned, the focus will be on
horizontal issues24 arising from such mergers, rather than any
19 IOSCO, together with the Basel Committee on Banking Supervision and
the International Association of Insurance Supervisors, constitute the Joint Forum.
Press Release, Int'l Org. of Sec. Comm'ns, Joint Forum: Amplified Mandate (June
14, 2002) (availableat http://www.iosco.org/news/pdf/IOSCONEWS3.pd.
20 GATT was part of the Bretton Wood's enginery with the aim of reducing
barriers to international trade and foster-together with the other measures
adopted at the time-recovery after World War II. ROSA MARIA LASTRA, LEGAL
FOUNDATIONS OF INTERNATIONAL MONETARY STABILITY 346-47 (
21 GATS resulted from the Uruguay Round negotiations and entered into
force in 1995. It is a treaty of the WTO to extend the multilateral trading system of
the GATT to services. General Agreement on Trade in Services, Apr. 15, 1994,
Marrakesh Agreement Establishing the World Trade Organization, Annex 1B,THE
LEGAL TExTS: THE RESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADE
NEGOTIATIONS 283, 33 I.L.M. 1125, 1168 (1994). See generally, The General
Agreement on Trade in Services (GATS): Objectives, Coverage and Disciplines,
http://www.wto.org/english/tratop-e/ serv-e/ gatsqa-e.htm (lastvisited Nov. 28,
2007) (providing a background and overview of the GATS).
22 The term "competition law" also covers what is known as "antitrust law"
in the United States.
23 From a competition standpoint, stock exchange mergers may have a severe
impact on the competition among stock exchanges and thus lead to higher fees
and lower quality of service.
24 Horizontal mergers are mergers between parties that operate in the same
relevant market. Such mergers can increase the market power of the merging
firms so that they could unilaterally impose a profitable post-merger price
increase. Other firms in the market might raise their prices in response, also
vertical issues25 arising from cross-border stock exchange
mergers. 26 Within the specific regulatory aspects we will focus on
the following competition law issues:
" the provision of primary listing services to domestic
" the provision of secondary listing services and primary
listing services to companies seeking listings outside
their domestic market;
" the provision of on-book equities trading services;
* markets for bonds and derivatives trading; and
" markets for information services as well as information
This Article does not purport to substitute the
competition/ regulation assessment of cross-border stock exchange
mergers conducted by any competition/regulatory authority in
any jurisdiction. It aims to provide a critical overview of some of
the issues that may arise in cross-border stock exchange mergers.
It does not attempt to provide a complete competition/regulation
assessment of exchange mergers, since competition/regulation
authorities can conduct such an assessment in their own capacity.
In addition, this Article does not focus on any particular
jurisdiction for assessing the likely anticompetitive impact of
exchange mergers. Thus, if this Article alleges a likely adverse
impact on competition, it does not refer to the legislation of any
particular jurisdiction. This Article adopts a substantive rather
than jurisdictional approach, and attempts to address the issues of
unilaterally. Thus, rivalry might weaken. Moreover, a horizontal merger may
increase the likelihood of (or stability and sustainability of) collusion, either tacit
or explicit, between the remaining firms in the market.
25 Vertical mergers are mergers between parties that operate at different
levels of an industry. Such mergers, though often pro-competitive, may in some
circumstances reduce competitive constraints faced by the merged firm as a result
of increased barriers to entry, raising rivals' costs, substantial market foreclosure
or increased likelihood of collusion. This risk is, however, unlikely to arise except
in the presence of existing market power or in markets where there is already
significant vertical integration as well as vertical restraints.
26 No vertical issues in any relevant market will be addressed in this paper.
For a report that addresses vertical issues to some extent in detail, see
COMPETITION COMM'N, A REPORT ON THE PROPOSED ACQUISITION OF LONDON STOCK
EXCHANGE PLC BY DEUTSCHE BORSE AG OR EURONEXT NV 6-7, 24-27, 66-74 (2005),
fulltext/504.pdf [hereinafter COMPETITION COMMISSION REPORT].
competition that are likely to arise in jurisdictions as a result of
cross-border exchange mergers. 27
SOME NOTES ON STOCK EXCHANGES AND THEIR REGULATION
A capital market is a market within a financial system that
provides a range of investment and financing tools. Capital
markets can be considered as both primary capital markets (for an
initial issuance of securities) and secondary capital markets (for the
trading of securities previously issued). Moreover, capital markets
operate with either equity securities (i.e., shares of a company, be it
by means of an initial issuance or initial public offering ("IPO"), or
by subsequent purchases and sales in the secondary market) or
debt securities (e.g., bonds or other listed debt instruments). A
transaction in a capital market can take place on the market itself
(i.e., on a formal stock exchange), or off-the-market (i.e., off the
stock exchange). If it occurs off-the-market, it is considered an
over-the-counter ("OTC") transaction.
A stock exchange is a formal (regulated) capital market where
securities (equity and debt) are issued (primary market) and traded
(secondary market). In academic economic literature, there are "at
least three views of stock exchanges: the exchange as a market [or
trading system], the exchange as a firm, and the exchange as a
A stock exchange is a market or trading system that must: (
provide trade execution facilities; (
) provide price information in
the form of buy and sell quotations on a regular or continuous
basis; (3) engage in price discovery through its trading procedures,
rules, or mechanisms; (4) have either a formal market-maker
structure or a consolidated limit order book, or be a single price
auction and centralize trading for the purpose of trade execution;
and (5) exhibit through system rules or design the likelihood of
creating liquidity in the sense that there be entry of buy and sell
quotations on a regular basis, such that both buyers and sellers
have a reasonable expectation of regularly executing their orders at
In addition, a stock exchange can be seen as a firm that
produces a composite good - the exchange of securities - which
may be formed of different elements, such as price formation,
counterpart research, insurance for a good clearing, and the
standardization of the good exchanged. 30 According to this view,
the owners of the exchange should satisfy all interested entities:
intermediaries, issuers, and investors. Due to ownership
structures, some of the customers may be the owners of the firms
as well. Thus, the exchange's price for some of its products, e.g.,
trading fees, can influence the shareholders' value through the
profitability of the exchange itself (and the impact of this
profitability on the value of the firm) as well as through the price of
the exchange's composite product that the
consumers/shareholders are consuming. Private management and
ownership may give greater efficiency to the exchange.
Finally, according to the view of the exchange as a
brokerdealer, the exchange is a kind of intermediary among
intermediaries. The exchange gathers trading orders and supplies
the way of executing them.
An exchange facilitates information production and
dissemination, as well as competition among traders. To facilitate
this interaction, a stock exchange provides a marketplace where
new shares are issued in companies seeking a listing and where
those shares can be traded between investors. A stock exchange is
responsible for setting criteria that companies must meet and
continue to comply with to obtain and retain a listing. An
exchange also has to ensure that the marketplace for securities
which it operates works efficiently and is as transparent as
possible. Finally, a stock exchange regulates direct access to the
marketplace through membership admission and subsequent
As seen from previous paragraphs, another important aspect of
stock exchanges is regulation. Regulation, as noted by Lastra,
"refers to the establishment of rules, to the process of rulemaking,
and includes legislative acts and statutory instruments issued by
the competent authorities nationally and supranationally,
international rules. .. , and rules issued by self-regulatory
organizations and private bodies or 'clubs."' 31 Abrams and Taylor
30 Tommaso Padoa-Schioppa, La piazza finanziaria italiana: la sfida della
privatizzazione [The Italiam Financial Market: The Challenge of Privatization],
BOLLETrINO ECONOMIco, Feb. 1997, at 90, 90-91 (Italy).
31 LASTRA, supranote 20, at 84-85.
argue that in order to create an effective regulatory structure, the
regulatory agency or agencies that have to perform supervisory
functions must: (
) have clear objectives, (
) be independent and
accountable, (3) have the necessary resources to perform the tasks
commended, (4) have effective enforcement powers, (5) have
comprehensive rules covering all aspects, (6) be cost efficient, and
(7) have a structure that reflects the structure of the industry that it
has to regulate. 32
In addition, specific regulation by itself would not be sufficient
unless there are: (
) sound corporate governance practices; (
preventive measures to avoid unfair barriers to entry,
anticompetitive practices, and abuse of a market dominant position; (3)
tax laws; (4) dispute resolution mechanisms; (5) an insolvency
framework; and (6) a respect for the rule of law. 33
The interaction between regulation and enforcement is carried
out by supervision, which in a broad sense includes the following
) licensing, (
) supervision stricto sensu, (3) sanctioning
for non-compliance or breaching the applicable set of norms, and
(4) crisis management. 35 Although there is no single correct
approach to a regulatory issue, regulation should promote
transparency of trading to deter manipulation and ensure the
proper management of large exposures, default, and market
The aim of stock exchange regulations and enforcement is to
provide confidence to investors. If investors are confident with the
market, they will be attracted to invest and the capital markets will
grow. Capital markets play an important role in developed and
As a result of globalization and deregulation, we have been
faced with an increased number of changes in the international
financial markets. These changes have been exacerbated by the
current business cycle and the need for large amounts of money to
finance ongoing transactions. In addition, the technical evolution
of communications has provided better and more reliable
resources for the financial industry. All of these factors, together
with the deregulation and harmonization achieved by means of
"soft law", 37 have been determinant factors in the expansion of
financial services. 38
One of the lessons the International Monetary Fund has drawn
from the Asian crisis is the need for proper sequencing of capital
account liberalization and financial sector development -including
supervision and regulation, risk management, and transparency. 39
The Asian financial crisis triggered several proposals to reform the
international financial system. These proposals, focusing on the
prevention and avoidance of financial crises, have been
denominated the new International Finance Architecture. 40 In the
wake of the new International Finance Architecture, international
organizations such as the IOSCO and the International Accounting
Standards Committee ("IASC") are very active in the study,
coordination, and promulgation of international standards in the area
of financial market regulation and disclosure. Although their
promulgations have the characteristic of being "soft law," they are
being adopted and transformed in law in developing and
37 Soft law can be defined as guidelines that become generally accepted
although they are neither enforceable nor legally binding.
38 It is worth stressing that most of these changes, starting in the late 1970s
and early 1980s, led to a truly international financial market in the early 1990s that
has moved extremely quickly as a result of the use of the Internet.
39 Horst Kohler, Managing Dir., Int'l Monetary Fund, A Public-Private
Partnership for Financial Stability, Address at the Institute for International
Finance, (May 31, 2001), availableat http://www.imf.org/external/np/speeches/
40 For a description of the emergence of the International Financial
Architecture, see Mario Giovanoli, A New Architecture for the Global Financial
Market: Legal Aspects of InternationalFinancialStandard Setting, in INTERNATIONAL
MONETARY LAW: ISSUES FOR THE NEW MILLENIUM 3 (Mario Giovanoli ed., 2000). For
a detailed description of the proposals on the new International Financial
Architecture, see BARRY EICHENGREEN, TOWARD A NEW INTERNATIONAL FINANCIAL
ARCHITECTURE: A PRACTICAL POST-ASIA AGENDA (1999).
CROSS-BORDER STOCK EXCHANGE MERGERS
developed countries at both the domestic and regional level. The
most relevant documents on stock exchanges in the international
arena are IOSCO's 2002 Objectives and Principles of Securities
Regulation4l and the World Federation of Exchanges' Market
Principles 2002.42 Also, in the area of payment and settlement, the
Committee on Payment and Settlement Systems ("CPSS")- under
the auspices of the Bank for International Settlements ("BIS") -has
played an important role through the publication of the Core
Principles for Systemically Important Payment Systems, 43 the
CPSS/IOSCO Recommendations for Securities Settlement Systems, 44
and the CPSS/IOSCO Recommendations for Central Counterparties4.5
In addition to the international standards, specific market
associations have played a key role by providing standardized
contractual terms, e.g., the "Global Master Repurchase
Agreement" 46 and the "Convertible Asset Swap Transaction" 47
provided by the International Capital Market Association
("ICMA") and the International Swaps and Derivatives
Association ("ISDA"), respectively. The latter has played a very
important role in the harmonization of contractual terms that has
lead to practice harmonization since the drafters were the
participants themselves- which implicitly guarantees their
41 INT'L ORG. OF SEC. COMM'NS, supranote 33.
42 See WORLD FED'N OF ExCHS., MARKET PRINCIPLES 2002 (
), available at
.pdf (suggesting minimum qualifications for securities markets to qualify as
43 COMM. ON PAYMENT & SETTLEMENT SYS., CORE PRINCIPLES FOR SYSTEMICALLY
IMPORTANT PAYMENT SYSTEMS (2001), available at http://www.bis.org/publ/
cpss43.pdf (providing core principles for payment systems for widespread
44 COMM. ON PAYMENT AND SETTLEMENT SYS. & TECHNICAL COMM. OF THE INT'L
ORG. OF SEC. COMM'Ns, RECOMMENDATIONS FOR SECURITIES SETTLEMENT SYSTEMS
(2001), available at http://www.bis.org/publ/cpss46.pdf (recommending
minimum standards intended to cover all types of systems all over the world).
45 COMM. ON PAYMENT AND SETTLEMENT SYS. & TECHNICAL COMM. OF THE INT'L
ORG. OF SEC. COMM'NS, RECOMMENDATIONS FOR CENTRAL COUNTERPARTIES (
available at http://www.bis.org/publ/cpss64.pdf (providing recommendations
for the major types of relevant risks).
46 This is the agreement that governs sale and repurchase transactions. It was
developed by ICMA with the Securities Industry and Financial Markets
Association and includes legal opinions on its enforceability in different
47 A template designed to use in inter-dealer convertible asset swap
These initiatives and the referred documentation have helped
EU regulators because the harmonization of different legal systems
was eased by the integration of countries that followed the
principles laid down by international organizations and
associations. The FSAP and the Lamfalussy report, with its
fourlevel procedure (framework principles, decisionmaking, national
implementation and cooperation, and enforcement), also played a
key role in the streamlining of financial regulation within the EU.
These resulted, as previously mentioned, in the adoption of the
ISD, which was superseded by the MiFID. Other directives are
also relevant in the area of securities regulation, i.e., the Market
Abuse Directive, the Prospectus Directive, the Transparency
Directive, and the Capital Adequacy Directive. In addition, a
communication on clearing and settlement was issued in April
200448 to improve clearing and settlement allowing market
participants to operate effectively in an integrated EU financial
market since-as noted by the European Commission-the
situation as of today is complex and fragmented, imposing costs,
risks and inefficiencies on investors, institutions and issuers. 49
Moreover, a draft proposal for a Directive of the European
Parliament and of the Council on payment services in the internal
market has been produced, and the final implementation of the
Directive is expected for 2008.50
While the aims of the EU and NAFTA differ-since the latter
only looks to create a free trade association-a positive movement
towards the unification of the international financial markets has
been accomplished among two of its three members (the United
States and Canada). The multi-jurisdictional disclosure system
("MJDS") was "designed to facilitate securities offerings in
multiple markets by subjecting the issuer to the regulations of only
CROSS-BORDER STOCK EXCHANGE MERGERS
one [country]."51 Due to the similarities between U.S. and
Canadian securities laws, the SEC authorized Canadian issuers
who had complied with their local regulations to issue securities
on the NYSE or Nasdaq. Unfortunately, the MJDS has not been
extended to other countries since its adoption in 1991. Regrettably,
since 1993, it is required to reconcile the financial statements with
U.S. generally accepted accounting principles ("GAAP").
On the one hand, with all these changes, financial markets have
gained in soundness. "IOSCO recognizes that sound domestic
markets are necessary to the strength of a developed domestic
economy and that domestic securities markets are increasingly
being integrated into a global market."5 2 Therefore, a significant
amount of credit has shifted from banks to capital markets in the
form of securities. In today's current state securities are more
liquid, more easily transferable, and have lower transaction costs.
On the other hand, since stock exchanges have become publicly
listed companies, like any other company, they need to produce
dividends, i.e., gains for their shareholders. Moreover, as a result
of globalization and in order to be able to compete with digital
platforms and continue to generate revenues, they must have an
international presence in key financial districts. This trend leads to
their need to acquire other players or merge and/or establish links
with their competitors or providers of similar services in markets
where they are willing to gain access.
However, all these changes and needs of the parties involved
should not distract from the three interrelated and sometimes
overlapping core objectives of securities regulation laid out by
) the protection of investors; (
) ensuring that markets
are fair, efficient, and transparent; and (3) the reduction of systemic
risk." 53 It should also be borne in mind that stock exchanges, as
financial institutions operating in financial markets, are prone to
risks and exposure. These risks include: (
) credit risk, (
risk, (3) interest rate risk, (4) foreign exchange risk, (5) operational
risk (which includes settlement risk), and (6) legal risk.
Modern financial regulation is based on risk management5 4
51 HAL S. SCOTT & PHILIP A. WELLONS, INTERNATIONAL FINANCE 78 (8th ed.
52 INT'L ORG. OF SEC. COMM'NS, supra note 33, at 1.
54 See, e.g., Avinash Persaud, Liquidity Black Holes and Why Modern Financial
Regulation in Developed Countries is Making Short-Term Capital Flows to Developing
posing a challenge to financial firms to develop market-risk
management techniques and to investors and regulators to observe
and quantify risk. Particularly in the United Kingdom -as noted
by Alexander-"the Financial Services and Markets Act 2000
("FSMA") and its accompanying regulations create a regime
founded on a risk-based approach to the regulation of all financial
business."55 From the UK perspective, it can be argued that the
risk-based approach can be divided into two approaches -a
general risk approach and a specific risk-by-risk approach -which
are identified under the Financial Services Authority's ("FSA")
prudential sourcebook. Although regulation should take into
account risks associated with stock exchanges, by no means should
regulation deter reasonable risks of the industry. On the contrary,
regulators should allow effective management of risks by
establishing safety nets to monitor risk-taking and eventually by
adopting the necessary measures (e.g., minimum capital
requirements) to have a buffer in place that is required as a result
of unforeseen circumstances affecting financial markets.
Another issue to consider is how many supervisory bodies
should be required for the surveillance of stock exchanges. In this
matter, Lastra argues that there is no single answer due to the lack
of empirical evidence, and that a state may have a single body, like
in the United Kingdom (and Norway and Denmark and more
recently in Germany and France), different bodies for different
industries (i.e., banking, securities, insurance, etc. as in Italy or
Spain) or multiple authorities within the industry, as in the United
States.5 6 The case of the United States is very interesting since
there are four sets of norms issued by different regulators: (
federal laws passed by the U.S. Congress, (
) state laws passed by
State legislatures, (3) regulations enacted by agencies (e.g., the U.S.
Countries Even More Volatile (United Nations Univ. World Inst. for Dev. Econ.
Research, Discussion Paper No. 2002/31, 2002) (proposing that the spread of
market-sensitive risk management systems leads to a more fragile financial
55 Kern Alexander, CorporateGovernance and Banking Regulation, (Cambridge
Endowment for Research in Fin., Research Programme in Int'l Fin. Regulation,
Working Paper No. 17, 2004).
56 LASTRA, supra note 20, at 96 (arguing that there is no empirical evidence
that any one model of organizing financial supervision is superior to any other).
But see Rosa M. Lastra, The Governance Structure for Financial Regulation and
Supervision in Europe, 10 COLUM. J. EUR. L. 49 (
) (opposing the idea of a single
EU financial regulatory body on the grounds of excessive concentration of power
and concerns about accountability and transparency).
CROSS-BORDER STOCK EXCHANGE MERGERS
Securities and Exchange Commission), and (4) regulation enacted
by self-regulatory organizations ("SROs," e.g., Nasdaq, the NYSE,
the Chicago Board Options Exchange, and the Chicago Mercantile
In addition, supervision can be performed by public, private, or
both types of bodies. However, considering the sensitive nature of
the matters involved in the event of a wrongdoing and the
potential consequences for the whole economy (e.g., the Asian
crisis) or the role to be performed by the government in the event
of a crisis (e.g., the Drexel Burnham Lambert Group, Baring Bros.,
and Long-Term Capital Management Fund cases), a certain degree
of public involvement is required. If a failure occurs, regulation
should aim at reducing its impact by isolating the distressed entity
and avoiding disruptions to the markets.
Supervision requires initial scrutiny to grant a license and
ongoing supervision to maintain the permission granted to
operate. Ongoing supervision implies compliance with the
required filings, meetings with officials from the supervisory body,
inspections and additional disclosure that may derive from such
inspections, and fulfilment of any resolution or sanction that might
be imposed by the regulatory body. In the United Kingdom,
sections 19 and 21 of the FSMA impose a general prohibition on, in
the course of business, engaging in regulated activities and/or
communicating an invitation or inducement to engage in
investment activity unless authorized by the FSA. Under section
138 of the FSMA, the FSA has the capacity to enact rules, although
specific reference is made to EEA 57 firms and the capacity of the
firm's home state regulator. Those persons that have been
authorized by the FSA will have to comply on an ongoing basis
with the FSMA and the FSA's Handbook of Rules and Guidance.5 8
57 EEA stands for Economic European Area and includes the twenty-seven
EU Member States plus Iceland, Lichtenstein, and Norway.
58 The FSA Handbook is a consolidated version of FSA's rule-making
instruments. It is divided into seven "Blocks" and each Block is subdivided into
Block 1 deals with the requirements for all authorized persons and approved
persons and contains general interpretative material. One of its modules is "FIT"
(the Fit and Proper test for approved persons), which sets out the FSA's minimum
standards for becoming and remaining an approved person.
Block 2 sets out the prudential requirements that will affect firms. The
Interim Prudential sourcebook ("IPRU") has five parts, each dealing with the
prudential requirements for different sectors, i.e., (
) IPRU(BANK), the prudential
and specific notification requirements for banks; (
) IPRU(BSOC), the prudential
U. Pa. J. In t'l L.
Carmichael and Pomerleano argue that in principle there are
two fundamentally different models of regulatory structure (i.e.,
either based on institutions or on functions)59. However, lines have
blurred and most regulatory structures in the world contain
elements of both.
The regulatory structure based on "institutions" fosters the
establishment of different separate legal entities to regulate
different aspects (e.g., prevention, functioning, crisis management,
etc.) of different financial service sectors (i.e., banks, insurance, and
securities). In some countries, two of the sectors are regulated
together (e.g., securities and insurance, banking and securities, or
and specific notification requirements for building societies and guidance on the
exercise of certain of the FSA's functions under the Building Societies Act; (3)
IPRU(FSOC), the prudential and specific notification requirements for friendly
societies; (4) IPRU(INS), the prudential and specific notification requirements for
insurers; and (5) IPRU(INV), the prudential and specific notification requirements
for investment firms.
Block 3 sets out most of the requirements that will affect firms day to day.
Some of its modules deal with codes of conduct, training and competence, and
Block 4 consists of modules describing the operation of the FSA's
authorization, supervisory and disciplinary functions. This Block is subdivided
into four modules: (
) AUTH (Authorization); (
) SUP (Supervision); (3) ENF
(Enforcement); and (4) DEC (Decision Making).
Block 5 contains three modules dealing with the processes for handling
complaints and compensation.
Block 6 contains specialist modules, which show how the FSA Handbook of
Rules and Guidance applies to certain sectors, such as credit unions. The most
relevant of the modules included in this Block from the perspective of this paper
is REC (Recognized Investment Exchanges and Recognized Clearing Houses),
which provides guidance on how the FSA interprets the recognition requirements
and other obligations on recognized bodies, such as Recognized Investment
Exchanges and Recognized Clearing Houses, under the FSMA.
Finally, Block 7 contains three modules which set out the requirements for
issuers listed on, or seeking admission to, the official list of the UK Listing
Authority ("UKLA"), rules that apply to a sponsor and a person applying for
approval as a sponsor, along with the prospectus and disclosure document
In addition, the FSA produces 14 sector-specific tailored handbooks of rules
and guidance for small firms (e.g., asset managers, corporate finance advisory
firms, general insurance brokers) which are about 90% smaller than the full FSA
Handbook of Rules and Guidance and provide the most relevant information for
each industry segment. To rely upon a tailored handbook, a firm needs to satisfy
itself that it matches the attributes listed for that tailored handbook. Financial
Services Authority, FSA Handbook, http://www.fsa.gov.uk/Pages/handbook/
(last visited Dec. 4, 2007).
59 JEFFREY CARMICHAEL & MICHAEL POMERLEANO, THE DEVELOPMENT AND
REGULATION OF NON-BANK FINANCIAL INsTITUTIoNS 21-73 (
CROSS-BORDER STOCK EXCHANGE MERGERS
banking and insurance - but at least there are two different
regulatory bodies).60 The weaknesses of this type of regulatory
structure are, inter alia: (
) inefficient use of resources; (
fragmented supervision; and, most importantly, (3) regulatory
arbitrage by large financial conglomerates.
The regulatory structure based on "functions" argues for the
establishment of separate agencies to regulate different sources of
market failure. Market failure is "a consumer oriented theory of
regulation, which is rooted in the idea that market forces are the
best means of ensuring that consumers' needs are met."61 The
theory is based on the assumption that fierce competition among
firms will generate benefits for consumers and that there is a
disequilibrium that needs to be restored by means of regulation.
The rationale behind this theory is that different "function"
regulators will tackle the causes of the disequilibrium. The causes
of the disequilibrium are competition, market conduct, asymmetric
information, and systemic stability. Obviously, this theory has
strengths (e.g., alignment of the regulation with the underlying
source of the market problem) and weaknesses (e.g., overlap,
conflict of agencies, and the resulting compliance inefficiency).
A third possible alternative in financial regulation supervision
is a unified regulatory body, as exists in the United Kingdom,
Norway, Denmark, Germany, and France. It is said that a single
regulator offers the best solution to efficiency, accountability,
conflict problems, and effective regulation of conglomerates
(reduction of regulatory arbitrage). However, the Centre for Policy
Studies produced a report in 2005 stating that the FSA (the United
Kingdom's single regulatory body) is "one of the most powerful,
and one of the least accountable, institutions created in the UK
since the war." 62
Sound and effective regulation is the key to the development
and integration of stock exchanges in the global market.
Soundness can be achieved by effective regulation. Effective
regulation will provide confidence and attract investors.
60 See How COUNTRIES SUPERVISE THEIR BANKS, INSURERS AND SECURITIES
MARKETS (Neil Courtis ed., 1999) (providing an overview of current financial
regulation practices around the world).
61 Harry McVea, Financial Services Regulation Under the Financial Services
Authority: A Reassertion of the Market Failure Thesis?, 64 Cambridge L.J. 413, 415
62 CENTRE FOR POLICY STUDIES, THE LEVIATHAN IS STILL AT LARGE: AN OPEN
LETTER TO MR JOHN TINER, CHIEF EXECUTIVE OF THE FSA 1 (2005).
U. Pa. J. Int'I L.
Confidence and more investors allow the stock exchanges to grow
and interact. The interaction might lead to mergers but at the least
will facilitate information-sharing, harmonization, and integration
facilitating disclosure (pre-trade and post-trade)- one of the pillars
in regulation since it promotes transparency, thus fostering
Regarding the rationale behind a merger between cross-border
stock exchanges, a report prepared by LECG argues that the
integration of the French, Belgian, Dutch, and Portuguese stock
exchanges "allowed Euronext to rationalize its operations and
significantly reduce its operating costs." 6 3 This report analyzed the
effects of the creation of Euronext. The process of integration
"expanded the set of securities accessible to a Euronext member"
and "increased the liquidity of the merging exchanges." 64
Therefore, it "reduced the implicit costs of trading." 65 "This
increase in liquidity is reflected in lower bid-ask spreads, greater
volume, and lower volatility .... [S]avings attained by Euronext
through the integration of the trading platforms of its constituent
exchanges... have been the result, in particular, of the elimination
of duplications in IT activities and staff cost savings."66
The cost reductions achieved "were passed on to users via
lower trading fees." 67 The econometric analysis they conducted
showed "that the impact of integration on the average trading fee
in Paris was a reduction of 15%. The average trading fee in
Amsterdam fell by approximately 31% as a result of the creation of
Euronext.... Integration of the Euronext markets has allowed all
63 MARCO PAGANO & A. JORGE PADILLA, EFFICIENCY GAINS FROM THE
INTEGRATION OF EXcHANGES: LESSONS FROM THE EuRONExT "NATURAL EXPERIMENT"
4 (2005), available at http://www.competition-commission.org.uk/inquiries/
64 Id. at 49, 6.
65 Id. at 49.
"Trading costs can be classified as direct (or explicit) and indirect (or
implicit) trading costs. Direct costs include broker commissions and
exchange and other fees, while indirect costs relate to effective spreads
i.e., the difference between the price of a trade and the midpoint of the
best-quoted bid and ask prices, just prior to the trade. The indirect
component includes costs and risks associated with the immediacy or
ability to trade without delay."
OXERA CONSULTING, LTD., THE COST OF CAPITAL: AN INTERNATIONAL COMPARISON 28
) [hereinafter OXERA].
66 PAGANO & PADILLA, supranote 63, at 49-50.
67 Id. at 20.
CROSS-BORDER STOCK EXCHANGE MERGERS
from the incumbent exchange to the new entrant in the market
must be likely. The Competition Commission Report noted that
"network effects make a liquidity shift hard to achieve" and that
"in order for liquidity to shift, the incentives for trading firms have
to be substantial."15 9 The Competition Commission went on to
identify seven necessary conditions for switching to take place:
(a) the new entrant must provide lower pricing and
better quality of services; 160
(b) the new services must be able to be delivered by the
entrant at a low cost;
(c) the customers must be dissatisfied with the
(d) there must be a powerful, concentrated customer
group, which has the ability to switch its trading
business from the existing venue to the new
(e) this customer group must move in a coordinated
(f) there must be no regulatory or political barriers in
place fettering the entrant; and
(g) there must be full access to existing clearing and
settlement infrastructure. 161
The exchange brings together the two complementary types of
"willingness" -the willingness of two parties to sell and buy at
Price "p." The availability of both types of "willingness" is critical
for the exchange to occur. 162 A positive size externality is that the
increasing size of an exchange market increases the expected utility
of all participants. Each investor benefits from the presence of
other investors trading on the same platform. This is because the
presence of larger numbers of traders tends to bring liquidity to the
market. Thus, volume tends to concentrate on one trading
platform. Traders are likely to send their orders simultaneously
159 COMPETITION COMMISSION REPORT, supranote 26, para. 5.59.
160 The Competition Commission was referring to pricing towards the
exchange's customers (e.g., banks, etc.).
161 COMPETITION COMMISSION REPORT, supra note 26, para. 5.60.
162 See Nicholas Economides, The Economics of Networks, 14 INT'L J. INDUS. ORG.
673, 679 (1996) (explaining that an exchange of assets "brings together the
'willingness to sell at price p' (the 'offer') and 'willingness to buy at price p' (the
'counteroffer') and creates a composite good, the 'exchange transaction"').
since the likelihood of these orders being executed increases. For a
credible threat of head-to-head competition, a competitor must
offer a service with sufficient incentives to induce trading firms to
overcome the disadvantages associated with switching costs.
Clearing and settlement arrangements are also obstacles to
competition for trading. Any entrant arguably requires access to
the same or equivalent back office infrastructure as the incumbent.
Other key issues include the quality of regulation and stock
exchange rules, costs of trading and post-trading, technology
improvements that benefit users, the costs of investment in IT
systems, and technology and the extent to which markets offer
access to a rich variety of fund managers and investors.
The UK Competition Commission identified "two broad
strategies that can be adopted to engage in head-to-head
competition with an incumbent exchange, which could lead both
[exchanges] to a shift in liquidity and/or induce the incumbent
exchange to react by improving its offer." 163 A potential entrant
may offer the same type of service as the incumbent, at a lower
price. The Commission further stated that "in order for this
strategy to succeed, the competitor needs to be able to afford to
offer a sustainable incentive to switch liquidity in the form of a
lower price. " 164 In addition, the competitor exchange
may focus on product differentiation and [aim] to capture
market share from the incumbent by introducing an offer
which is seen as superior to the incumbent by a significant
number of its users. In any attempt to shift liquidity there
may be elements of both strategies as firms attempt to offer
both a better and cheaper service. 165
The Competition Commission identified a number of
exchanges that exercise a competitive constraint on the LSE,
including Euronext, Deutsche BOrse, Nasdaq, NYSE Group, and
OMX. 166 The Competition Commission argued that "the threat that
[these exchanges] will expand their services and compete directly
with LSE which disciplines LSE, forcing it to maintain higher
service levels and lower fees than would otherwise be the case."167
163 COMPETITION COMMISSION REPORT, supra note 26, para. 5.38.
166 Id. paras. 5.64-71.
167 Id. para. 5.80.
CROSS-BORDER STOCK EXCHANGE MERGERS
Given the number of credible potential competitors to the LSE, the
Competition Commission concluded that the elimination of the
horizontal constraint exercised by any one potential competitor is
insufficient to give rise to a substantial lessening of competition
within the market for on-book equities trading services in the
United Kingdom. 68
In Europe, the examples of competition for trading in listed
securities (such as, in 2004, the Dutch Trading Service) should be
seen as credible threats -effective in gathering support among
users and forcing incumbent exchanges to react-rather than as
shifts in market shares. The degree of competition for trading is
consequently low, and the threat of competitive entry (including
from a non-European/U.S. exchange) is not likely to place a strong
constraint on the major European exchanges.
As mentioned above, it is unlikely that there is any significant
actual competition in the market for the trading of cash equities
between stock exchanges. As far as potential competition is
concerned, network effects make a liquidity shift hard to achieve
and, in this sense, represent a switching cost for customers. These
costs imply that in order for liquidity to shift, the incentives for
trading firms have to be substantial. Incentives may take the form
of lower trading costs or incentive payments by the entrant
exchange. However, for exactly the same reasons, the potential
benefits for a competitor to induce such a shift are proportionately
higher. Once gained, it will be hard for the incumbent exchange to
win these customers back. Thus, the liquidity for a particular
equity or group of equities will typically rest in one exchange. The
shifting of that liquidity is crucially dependent on network effects.
The stickiness of liquidity therefore represents the greatest barrier
to entry in trading.
Even if the argument of strong potential competition is valid,
the potential entrants in the EU include, inter alia, LSE, Euronext,
Deutsche Bbrse, Nasdaq, the NYSE Group, and OMX. Thus, any
merger between two of these stock exchanges is unlikely to induce
significant anticompetitive concerns in the EU, since there are
adequate stock exchanges in the post-merger market to impose a
credible threat of head-to-head competition on an incumbent.
168 COMPETITION COMMISSION REPORT, supra note 26, paras. 19-20.
TRADING OF DERIVATIVES
Derivatives are securities whose value is derived from some
other time-varying, underlying instrument, usually the price of
bonds, stocks, currencies, or commodities, as well as the movement
of an index.169 Derivatives aim at providing insurance against
market fluctuations. Trading in derivatives does not involve actual
issuance of physical securities. 170
Examples of derivatives are futures and options. A futures
contract is a standardized, transferable, exchange-traded contract
that requires delivery of a commodity, bond, currency, or stock
index, at a specified price, on a specified future date. While
options entail a right, futures convey an obligation to buy. An
option is a right to buy (call option) or sell (put option) an asset by
a set date for a set price. 171
Exchanges may trade in equity derivatives, equity index
derivatives, capital market or long-term interest rate derivatives,
money market or short interest rate derivatives, commodity
derivatives, and currency derivatives. An argument can be made
that the above-mentioned types of derivatives constitute separate
product markets. Each type of derivative has different
characteristics and is used to achieve a different investment
outcome. Derivatives exchanges may trade products in these
Liquidity for each product tends to be concentrated on one
exchange. Exchanges tend not to compete directly with each other
but may impose a competitive constraint through the threat of
launching a trading service for a specific derivative contract in
direct competition with an existing exchange.
A significant number of derivatives trades are completed
offexchange. OTC trading of derivatives is more intense than OTC
trading of equity. 72 OTC provides a customized service, including
less regulation than applicable to on-exchange trading, private
169 See SCOTr & WELLONS, supra note 51, at 939 (introducing the topic of
derivatives including a discussion of futures and options); InvestorWords.com,
Option Definition, http://www.investorwords.com/3477/options.html (last
visited Dec. 2, 2007).
170 With regards to bonds, this Article will focus on the listing and trading of
bonds rather than on post-trade services related to bonds.
171 ScoTr & WELLONS, supranote 51, at 939.
172 See COMPETITION COMMISSION REPORT, supra note 26, para. 2.4 (discussing
equity trades that can occur off-book).
CROSS-BORDER STOCK EXCHANGE MERGERS
negotiations, as well as discretion in the price. In particular,
negotiations for on-exchange trading are transparent; whereas they
are private in OTC trading, trading on-exchange is a regulated
market where trades are standardized and are cleared and netted.
OTC trading involves unregulated markets, where standardization
as well as clearing and netting is limited. In addition, traders may
have access to a wider pool of liquidity on exchange, including
customers whose credit standing precludes them from using OTC
OTC and certain types of on-exchange derivatives tend to be
complementary, since OTC occurs in complex transactions that
cannot be completed on-exchange. For certain types of derivatives
(e.g., when the underlying asset is equity), OTC plays a less
significant role, compared to derivatives having other underlying
Criteria that investors take into account in choosing between
on-exchange and OTC trading, include inter alia, the risk against
which investors want to hedge, the availability of a suitable
onexchange traded product, the size of the trade, the customization of
the trade needed, the anonymity as well the desired impact on the
price of the instrument, and the costs involved in the trade.
Not all exchanges offer trading in all types of derivatives. If
derivatives using different underlying assets are not substitutable
from the customers' perspective due to the fact that they satisfy
different customer needs, then each type of derivative may
constitute a separate product market. In order for investors to
substitute between two derivatives contracts having different
underlying assets, these contracts must provide the same
investment outcome that the investors want to achieve. For
example, the financial market risk against which the investor aims
at insuring, will determine the type of derivative he will use.
Factors such as the duration of the derivative contracts, as well as
the legal aspects also contribute to the substitutability of different
types of derivatives contracts.
However, if investors can achieve the same investment
outcome by trading two different types of derivatives, or a bundle
of different types of derivatives, then there is some substitutability
between these types, and the product market may include more
than one type of derivative. For example, customers may trade on
derivatives that have equity of multinational companies as their
underlying asset. This type of investment incorporates derivatives
traded on more than one exchange as a means to hedge the market
risks they face. Thus, these derivatives may be considered
substitutes for one another.
In order for all the types of derivatives, irrespective of the
underlying asset, to constitute one market, exchanges must be able
to easily switch between the provisions of trading of these types of
derivatives. However, as is the case with equity trading, liquidity
plays an important role on the exchange that will have the majority
of trading of a particular type of derivative. As the Competition
Commission Report stated, derivatives exchanges may trade
products in "equity derivatives, equity index derivatives, capital
market or long-term interest rate derivatives, money market or
short interest rate derivatives, commodity derivatives, and
currency derivatives." 173 In addition, "liquidity for each product
tends to be concentrated on one exchange." 174
Another possible angle of the product frame of reference for
derivatives is whether derivatives are substitutable according to
the type of derivative (e.g., future vs. option) rather than according
to the underlying asset. Investors are driven by the return on their
investment. Thus, it seems likely that investors will use the
underlying asset as the major choice factor. They are more likely to
invest based on underlying assets familiar to them (e.g., stock
index, interest rate) rather than on the type of contract. The choice
of the type of contract (e.g., option, future) is likely to be made
after the underlying asset has been chosen. Thus, it seems unlikely
that the market will be defined according to the type of contract. 175
The OFT in the analysis of the Euronext NV/LIFFE Holdings
plc1 76 merger argued that, in the short term, exchanges tend to
specialize in certain product areas. Liquidity for each product
tends to be concentrated on one exchange, and, therefore,
exchanges do not always compete directly with each other.
Although some customers substitute between products, each
product has different characteristics and is traded in different
situations for different investment aims.
The OFT defined five separate derivative products: (
173 COMPETITION COMMISSION REPORT, supra note 26, para. 4.60.
175 Notwithstanding, a complete competition analysis may illustrate different
dynamics in competitive choices.
176 Office of Fair Trading, PROPOSED ACQUISITION BY EURONEXT NV OF LIFFE
HOLDINGS PLC (2001), availableat http://www.oft.gov.uk/adviceandresources/
resourcejbase/Mergershome/mergersjfta/mergers fta advice/euronextnv.
CROSS-BORDER STOCK EXCHANGE MERGERS
) equity indices, (3) capital (medium- to long-term interest
rates), (4) money (short-term interest rates), and (5) commodities.
In addition, the OFT argued that OTC trading provides some
degree of competitive constraint on exchanges, in terms of both
prices and services. In the long term, the OFT argued that
exchanges compete with each other in terms of innovation, rules,
cost reductions, and other services. The relevant product market in
the longer term was defined as the supply of derivative exchange
services. However, in contrast to the OFT's position, the
Competition Commission Report argued that derivatives
exchanges "may trade products... in a selection of... areas." 177
Although no concrete conclusions can be made regarding the
product and geographic market of derivatives trading, it seems
likely that each type of derivative constitutes a separate product
market with an international dimension. Thus, separate product
markets may be identified for equity derivatives, equity index
derivatives, long-term interest rate derivatives, short-term interest
rate derivatives, commodity derivatives, and currency derivatives.
There may be some scope for derivatives having similar
underlying assets (e.g., long-term interest rate and short-term
interest rate derivatives) to constitute one single market. However,
this will depend on the actual substitutability between these two
financial instruments in hedging against the same type of risk and
achieving the same investment aims of investors. Such
substitutability, without further investigation of customers and
competitors of merging exchanges is ambiguous.
"The four largest derivatives exchanges globally (by value of
turnover) are the Chicago Mercantile Exchange; Euronext/Liffe;
the Chicago Board of Trade; and Eurex."178 The following tables
indicate the market share of the largest exchanges for stock options
and stock futures as well as in short term interest rate options and
177 COMPETITION COMMISSION REPORT, supranote 26, para. 4.60.
178 Id. para. 5.11.
179 ANNUAL REPORT, supra note 99, at 104. The percentages have been
calculated based on the total value of trading on all exchanges that a particular
derivative is traded.
~U$ml2i0n05 Notional Value
in US$ millions
Chicago Board Options Exchange
Sao Paulo SE
Bourse de Montreal
National Stock Exchange India
BME Spanish Exchanges
2005 Notional Value
in US$ millions
Short term Interest Rate Options
Chicago Mercantile Exchange
Chicago Board of Trade
Bourse de Montreal
180 Id. at 100.
181 Id. at 101.
182 Id. at 104.
CROSS-BORDER STOCK EXCHANGE MERGERS
Short term Interest Rate Futures
Chicago Mercantile Exchange
Chicago Board of Trade
Tokyo Financial Exchange
Bourse de Montreal
As these tables indicate, not all exchanges have a material
overlap in these types of derivatives. Thus, not all likely mergers
between these exchanges lead to post-merger entities having
significant market shares. The same conclusion can be drawn for
all types of derivatives.
Competition for derivatives trading can take two forms, as can
competition for equities trading:
) direct (head-to-head) competition for the same
) threat of head-to-head competition.
In regards to actual competition, not all exchanges are direct
competitors for all types of derivatives. For example, there is
unlikely to be any significant overlap in index derivatives since
derivative products based on national indices are available on the
exchanges where the listed equities are traded.
As was the case for equities trading, and was outlined in the
beginning of this Article, the possibility of potential competition
will depend on the likelihood that liquidity will switch between
exchanges. Unless there is an important technological
development, a switch in liquidity is unlikely.
Other aspects of competition include the provision of
immediacy, price discovery, low price volatility, liquidity,
transparency, transaction cost, reputation, quality, innovation, and
rules. The provision of derivatives trading entails services such as
pre-trade price discovery, trade matching, as well as post-trade
management services. Elements of this service competition include
trading hours, regional offices, and most importantly, the trading
U. Pa. J.Int'l L.
technology. Malkamaki argued that scale economies exist only in
the very large exchanges but that there are significant scale
economies with respect to the processing of trades. 184 This author
also argued that "legislation and interim regulation of stock
exchanges, as well as the microstructure of the trading system, are
important elements of a liquid and efficient trading environment.
It would .. .be optimal to centralize the trading systems so as to
maximize scale economies arising in the processing of trading."8 5
Transaction costs indicate the explicit costs, which include
broker commissions and exchange and other fees, effective
spreads, as well as the implicit costs of the time required for its
settlement. Because investors look for markets with smaller
transaction costs, transaction costs are also associated with higher
liquidity. Higher liquidity increases the utility of market
participants. Transaction costs can have a negative impact on price
discovery and volatility1 86 Price discovery is the process by which
a market attempts to find transaction prices that bear the least risk.
Investors prefer markets that have a greater flow of information. 8 7
Technological advancements such as computerized trading
systems contribute to cross-border trading. Such advancements
also contribute to more efficient trading by minimizing the delays
and thus reducing the associated costs and contributing to
beneficial spreads. Investors also look for operational efficiency
and transparency. They are concerned about facilitation of their
transactions (by matching buy and sell orders)lSS As the
Competition Commission Report mentions,
the extent to which off-book trading of derivatives, or the
threat of head-to-head competition by a new derivatives
exchange, represent a competitive constraint to an
incumbent exchange, turns on... [many factors, including]
184 Markku Malkamki, Economies of Scale and Implicit Mergers in Stock
Exchange Activities? 25 (Mar. 16, 2000) (unpublished manuscript, on file with the
University of Pennsylvania Journal of International Law).
185 Id. at 25, 29.
186 See BENN STEIL ET AL., THE EUROPEAN EQUITY MARKETS: THE STATE OF THE
UNION AND AN AGENDA FOR THE MILLENNIUM 65 (1996) (concluding that transaction
costs affect price discovery and short-period price volatility).
187 Ramos, supranote 10, at 26.
188 See Ramos, supranote 10, at 26 (identifying factors that investors and firms
look for in deciding whether to trade or list which exchanges can use to attract
CROSS-BORDER STOCK EXCHANGE MERGERS
the degree of substitutability between on- and
off[exchange] trading of derivatives and the responsiveness of
trading volumes to increases in exchange fees. 8 9
Off-exchange trading - although a separate market from
onexchange trading-poses a significant competitive constraint on
on-exchange trading. Thus, exchanges are likely to take the
possibility of OTC trading into account in setting their pricing and
innovation strategies. Regarding a shift in liquidity due to an
increase in the trading fees, as the Competition Commission Report
network effects make a liquidity shift hard to achieve, and
in this sense represent a switching cost for customers. These
costs imply that in order for liquidity to shift, the incentives
for trading firms have to be substantial. These incentives
may take the form of lower trading costs or incentive
payments by the entrant exchange. However, for exactly
the same reasons, the potential benefits for a competitor to
induce such a shift are proportionately higher. Once
gained, it will be hard for the incumbent exchange to win
these customers back. 90
As mentioned above in the analysis of the equities trading
market, an important competition factor is technological
advancement. Trading fees do not play an important role in
trading. Technological advancements contribute to cross-border
trading as well as to more efficient trading by minimizing the
delays and thus reducing the associated costs and contributing to
beneficial spreads. The intensifying competition in the market is
due to commitments by regulators of promoting competition, as
well as due to advancements in technology. Finally, pressure from
customers has also contributed to intensifying competition.
As the above analysis has illustrated, exchanges face strong
competitive constraints from OTC trading. In addition, the driving
force of competition seems to be technological advancement. 191
189 COMPETITION COMMISSION REPORT, supra note 26, para. 4.61.
190 Id. para. 5.59.
191Stock exchange mergers may have both positive and negative effects on
technological advancement. A positive impact involves economies of scale in
innovation, whereas the negative impact may include less incentive to innovate,
as well as limited ability for competitors to enter the market. An additional
essential factor for competition is the post-trade services. Without a unified
postImproved technology can lead to efficiency in matching and
executing orders, to lower trading costs, as well as to an increase in
the volume of trading. Competition seems to be strong, and a
merger between two of the exchanges may lead to a dampening of
this competition in technological advancement. However, not all
exchanges are direct competitors for all types of derivatives. Thus,
the likely overlaps are likely to be fewer than the types of
derivatives available. 192 As regards the threat of head-to-head
competition, a significant number of exchanges exist and may pose
competitive constraints on each other (e.g., Chicago Mercantile
Exchange, Euronext/Liffe, the Chicago Board of Trade, and Eurex).
Turning to the framework of competition assessment, taking
into account the fact that the majority of derivatives trading occur
OTC, as well as the fact that competition takes place in the form of
competition for technological advancement and the existence of a
significant number of major exchanges, a merger between two
exchanges may not create severe competition concerns. However,
as Tables 7, 8, 9, and 10 indicate, on some types of derivatives a
potential combination of some of exchanges may lead to a
significant market share of the merged entity. 193 In such
hypothetical merger situations, a merger between two leading
exchanges in these markets may lead to an adverse impact on
This outcome is based on an assessment of the publicly known
facts. An investigation by a competition authority may reveal an
adverse impact on competition in derivatives trading resulting
from a merger between exchanges. Any potential competition
concerns may arise as a result of a worsening of the derivative
exchange services incorporating innovation, rules, cost reductions
and other services.
trade system, users need to net positions against each other, incurring higher
costs. However, as mentioned in the introduction of this paper, post-trade
services are outside the scope of this paper. Thus, no further analysis will be
provided. See id. para. 5.136 (providing a detailed account of the likely impact of
mergers on post-trade services).
192 Assuming that each type of derivative constitutes one separate product
market, this is a reasonable assumption to make.
193 An indicating factor of likely concern may be the market share of the
postmerger entity. However, market shares as well as concentration ratios can only
provide an initial indication as to the effects of the merger and are not conclusive.
In this particular case, market shares may not be a good direct indicator of the
market power of exchanges because they will, to a great extent, simply reflect the
relative size of the capital markets associated with each exchange.
CROSS-BORDER STOCK EXCHANGE MERGERS
Bonds are issued by credit institutions, governments, or
companies and serve as long-term credit financing for the issuer.
Bonds can be classified in different forms, namely, interest rate
bonds (floating rate bonds, fixed rate bonds, zero coupon bonds),
government issued bonds (government/ federal bonds, Eurobonds,
emerging market bonds), and private issued bonds (corporate
bonds, collateralised mortgage bonds, Tier 1 bonds). Other types
of bonds include foreign currency bonds and convertible bonds.
With regards to bonds, this Article will focus on the listing and
trading of bonds rather than on post-trade services related to
bonds. Bond issuers are likely to list the bonds on the exchange
having a significant pool of liquidity. In addition, they are likely to
choose exchanges where other bond issuers having similar
characteristics to them (e.g., same nationality) have chosen as their
listing venue. Government bonds (public sector bonds) are more
likely to be listed on national exchanges than foreign exchanges
(except the case of developing countries that usually issue
sovereign bonds abroad), whereas corporate bonds are likely to be
listed both on the domestic as well as on foreign exchanges. It
should be noted that once the bond is listed, trading of the bond
occurs on a multitude of on-exchange as well as off-exchange
platforms, irrespective of the listing exchange.
The relevant product frame of reference may include both
government and corporate bonds. Further investigation will be
needed by competition authorities, with respect to the
substitutability between these two types of bonds, in order to
determine whether the market for the listing of bonds should
include both government and corporate bonds. This Article
attempts to address the issues that are likely to determine the
product and geographic frame of reference.
In Europe, the bond market is dominated by government
bonds and bonds issued by financial intermediaries. Researchers
at The Center for Economic Policy Research write, "In the United
States, the proportion of bonds issued by the non-financial
corporate sector is much larger. In addition, municipal bonds and
agency bonds are major components of this market." 94 The
194 BRUNO BIAIS, ET AL., EUROPEAN CORPORATE BOND MARKETS: TRANSPARENCY,
LIQUIDrrY, EFFICIENCY 1 (Ctr. for Econ. Policy Research ed., Corp. of London 2006)
following table indicates the top exchanges according to the value
of bond listings.
195 ANNUAL REPORT, supra note 99, at 88.
CROSS-BORDER STOCK EXCHANGE MERGERS
As Table 11 illustrates, exchanges receive listings of both
domestic public and private sector bonds, as well as of foreign
bonds. However, not all exchanges receive listings of foreign
bonds. From the top 23 exchanges receiving bonds listing, only in
five of them do foreign bonds listings represent more than 25% of
the total value of bonds listed. The majority of the value of listed
bonds represents domestic bonds in all cases except for the
Luxembourg Stock Exchange.
This table indicates that domestic public sector bond issuers
tend to list on the domestic exchange, which may not be the case
for domestic private bond issuers. 196 Thus, a degree of home bias is
indicated for domestic public sector bond issuers. Thus, the
geographic frame of reference is likely to be national.
As regards the listing of private sector bonds, in the majority of
these exchanges, the value of the public sector-listed bonds is
higher than the value of private sector listed bonds. This indicates
a tendency of private sector bonds being listed outside the
domestic market. Since not all exchanges receive listings of foreign
bonds, the geographic frame of reference for the listing of private
sector bonds may include certain exchanges (e.g., Luxembourg
Stock Exchange, LSE, Borsa Italiana, Swiss Stock Exchange). The
above analysis indicates that the geographic frame of reference is
likely to be regional/international.
As the European Central Bank states, "[t]he growing
importance of the euro as an international investment currency has
made the market for euro-denominated issues more attractive for
both investors and issuers." 197 Thus, a regional "Euro-zone"
geographic frame of reference may be relevant for both public and
private sector bonds of "Euro-zone" countries.
Assuming that the listing of private sector bonds constitutes a
separate market from the listing of public domestic bonds, further
investigation is needed to confirm whether national exchanges can
constitute the geographic frame of reference for the listing of
government bonds. Investigation is also needed to determine
196 This is true assuming that the total value of domestic public sector bonds
is not much higher than the figures of this table. In addition, the assumption is
made that the total value of domestic private sector bonds is higher than the
values indicated in the table. If any of these assumptions is not satisfied, then the
product frame of reference may not be the one alleged above.
197 EUROPEAN CENTRAL BANK, THE EURO BOND MARKET STUDY 5 (
available at http://www.ecb.int/pub/pdf/other/eurobondmarketstudy2004en.
whether the geographic frame of reference for the listing of private
sector bonds can include regional and/or transnational exchanges.
A more complete analysis of the degree to which domestic public
sector bonds are listed on the domestic exchange as well as of the
degree of "non-domestic"' listings of private sector bonds will shed
light on the relevant geographic frames of reference.
If the frame of reference can be defined in these terms, then any
cross-border exchange merger is unlikely to have any impact on
competition, since domestic exchanges are complementary as far as
the listing of public sector bonds is concerned. Regarding the
listing of corporate bonds, under a regional (or even international)
geographic frame of reference, certain permutations of mergers
between two or more of the above exchanges are likely to have a
significant anticompetitive impact.
If the product frame of -reference includes both public and
private sector bonds, then the geographic market is likely to be
regional/ international, since private sector bonds are more likely
to list outside the national market. As mentioned above, a regional
geographic frame of reference may include, inter alia, the
Luxembourg Stock Exchange, LSE, Borsa Italiana, and the Swiss
As mentioned above, trading of bonds occurs on a multitude of
on-exchange as well as off-exchange platforms, irrespective of the
listing exchange. 198 Although the Luxembourg Stock Exchange has
the largest value of bonds listed, it is not in the top 19 trading
exchanges with regards to bond trading, as the following table
198 A further segmentation may be made into trading by institutional
investors (wholesale trading) and trading by private investors (retail level). This
segmentation is not addressed in this Article further, but may constitute the
subject of an investigation by competition authorities.
CROSS-BORDER STOCK EXCHANGE MERGERS
TABLE 12: TRADING OF BONDS IN US$ MILLIONS, 2005199
Thus, the geographic frame of reference for bond trading is not
confined to national boundaries. Bonds are likely to be traded on
exchanges that can provide sufficient liquidity. As the ECB Report
stated, the key element behind the development of the European
199 ANNUAL REPORT, supra note 99, at 92.
bond market was the impetus for a better integrated and more
liquid market. 200 "Liquid bond markets bring transaction costs
down for investors, who therefore achieve greater gains .. .and
minimize the cost of funds to firms." 201 Competition is a key driver
of liquidity, so public policy should focus on openness and
competition. In addition, trading of a particular bond is likely to
take place on exchanges where other bonds having similar
characteristics (e.g., same nationality) are traded. One particular
characteristic may be the currency; thus, a possible geographic
frame of reference may be regional, comprising bonds traded in the
same currency (e.g., Eurozone).2 2 Improved access to financial
markets within the EU allows investors to diversify their portfolios
and invest more easily in foreign markets. Thus, investors are
likely to trade on exchanges other than their domestic one. Thus,
the geographic reference is likely to be at least regional (or even
Assuming the frame of reference is defined as the trading of
bonds at a regional geographic reference, any merger between
stock exchanges from different regions is unlikely to lead to
competition concerns, since there will be no overlap between the
activities of exchanges of different regions. If the geographic
reference is international, then certain permutations of mergers
between two or more of the above exchanges are likely to have a
significant anticompetitive impact.
An important factor in the assessment of the impact of
competition on the market for bond trading is the extent of bond
trading that occurs OTC. The ECB Report emphasizes the
importance of OTC trading in bonds. It argues that "[t]he
secondary market activity traditionally takes place in the wholesale
[OTC] market." 203 "The euro-denominated bond secondary market
has been characterized by the growing use of multilateral
electronic trading systems .... [Such systems have] lower costs,
higher liquidity, transparency and easier cross-border trading.
This trend was clearly visible in the more homogenous and liquid
200 EUROPEAN CENTRAL BANK, supra note 197, at 5.
201 BIAIS, ET AL., supra note 194, at 1.
202 The ECB Report stated that "since many investors prefer assets
denominated in local currency, the introduction of the euro has reduced the home
bias of euro area investors and further promoted the diversification of
investments within the euro area." EUROPEAN CENTRAL BANK, supranote 197, at 5.
203 EUROPEAN CENTRAL BANK, supranote 197, at 21.
CROSS-BORDER STOCK EXCHANGE MERGERS
government bond sector." 20 4 The European Central Bank also
states that due to "the large size of the OTC bond market,
competition among trading markets caused the proliferation of
new trading platforms [including] regulated markets and
alternative trading systems ("ATSs")." 2 5 A report by the Centre
for Economic Policy Research ("CEPR") also states that the
corporate bonds are mostly traded OTC.206 Thus, OTC poses a
significant competitive constraint on the provision of bond trading
services by exchanges. However, it is unlikely that OTC and
onexchange trading will constitute one single market, since these two
types of trading satisfy different needs.
In assessing the impact of a merger between two of the above
exchanges on competition, it should be noted that OTC trading is a
very important factor in the trading of bonds. The mere impact of
OTC bonds trading mitigates the severity of anticompetitive effects
on the market for the trading of bonds, since it is likely to exert
significant competitive constraints on on-exchange trading.
In some jurisdictions, the impact of a merger on the bond
trading market is unlikely to be important due to the fact that the
vast majority of bond trading occurs OTC. As the Competition
Commission argued, nearly 100 percent of bond trading in the
United Kingdom takes place off-book.207 In such cases, any merger
between cross-border exchanges is unlikely to induce any
materially adverse impact on competition, due to the lack of
onexchange bond trading.
MARKET INFORMATION SERVICES AND INFORMATION
204 Id. at 30-31.
205 Id. at 31.
206 BIAIS, ET AL., supra note 194, at 2.
207 COMPETITION COMMISSION REPORT, supra note 26, para. 2.4.
208 Id. para. 4.74.
U. Pa. J. In t'l L.
According to the Competition Commission Report, "[a]n
exchange is the sole provider of its proprietary market information,
[and such] information is not necessarily substitutable for market
information from another exchange." 2 9 It is likely that
nonproprietary market data is part of a wider financial services data
market.210 In such a wide market, there are a multitude of
providers of such information. Stock exchanges and financial
services companies, such as Reuters and Bloomberg, provide
nonproprietary information. Thus, the geographic frame of reference
is likely to be worldwide.
With respect to proprietary information, there is no overlap
amongst the different exchanges. A merger between stock
exchanges is unlikely to lead to any competition concerns due to
the lack of overlap. As regards non-proprietary information, due
to the large number of providers of such information, a merger
between stock exchanges is unlikely to lead to any competition
Turning to the market for information technology services,
such services relate to the development and provision of software
for electronic trading as well as for clearing and settlement.
OMX212 states that it is the world's largest provider of technology
solutions for securities trading, with a customer base that currently
encompasses more than 60 exchanges, clearing organizations, and
central securities depositories in more than 50 countries. 213 In
order to strengthen its offering to marketplaces, OMX acquired
Computershare's Markets Technology operations. According to
OMX, the combination of OMX and Computershare's product
portfolios will have the effect of substantially expanding their
offering to global exchanges. 214
Accenture, which is a global management consulting,
209 Id. para. 4.75.
210 Id. para. 4.76.
211 That will also depend on the extent to which an exchange holds shares on
a provider of non-proprietary information.
212 OaX owns exchanges in the Nordic and Baltic region, and develops and
provides technology and services to companies in the securities industry around
the globe. OMX Corporate, http://www.omxgroup.com/omxcorp/, (last visited
Dec. 9, 2007).
213 OMX ANNUAL REPORT 2005, at 21 (OMX Board of Directors, eds., 2005),
available at http://www.omxgroup.com/digitalAssets/937_OMX_2005_ENG
CROSS-BORDER STOCK EXCHANGE MERGERS
outsourcing, and technology services company, established itself as
a leader in the global marketplace. It assists capital markets in
offloading non-distinctive corporate and securities operations.
Accenture transformed how trading operations are executed and
how information is disseminated among investors. Some of its
customers include the LSE, Hong Kong Stock Exchange,
Johannesburg Stock Exchange, as well as DTCC, which is the
world's largest securities clearing, settlement, and servicing
Tata Consultancy Services Limited ("TCS") is one of the
world's leading information technology consulting, services, and
business process outsourcing organization. TCS has developed IT
solutions for over 500 customers all over the world. One of its
clients is the Bombay Stock Exchange. 216
Thus, from the examples included above, it can be concluded
that the relevant geographic frame of reference is likely to be
global. Several companies provide exchange-related IT services.
As was the case for non-proprietary information, due to the
existence of a multitude of companies providing IT services to
exchanges, on a global scale, any competition concerns as a result
of a merger between exchanges are unlikely to occur. However, if
the merger involves exchanges which hold shares in providers of
exchange-related IT services (e.g., OMX), then competition
concerns may arise. Such a conclusion needs to be based on a
careful assessment of the impact of such a merger.
It would be useful to present the benefits of financial
integration. London Economics prepared a report for the
European Commission on the integration of EU financial markets.
In that report, it argued that:
Through a more open and effective European financial
market a number of benefits are expected for both investors
and the corporate sector. Investors will benefit from higher
risk-adjusted returns on savings, through enhanced
215 See Accenture, http://www.accenture.com/Global/Services/Client
_Successes/By-Industry/Financial-Services/CapitalMarkets, (last visited Dec. 2,
2007) (describing scope of services and successes of clients).
216 About TCS, http://www.tcs.com/AboutUs/AboutUs.html, (last visited
Dec. 9, 2007).
U. Pa.J. In t'l L.
In particular, regarding equity markets, trading costs could fall
sharply as a result of full European financial market integration.
As regards corporate bond markets, financial market integration
will result in a deeper and more liquid market and should lead to
further reductions in the credit spread (or risk spread relative to a
comparable risk-free security) required by investors.
Some permutations of mergers may induce competitive harm
and thus lead to a post-merger market characterized by a lower
degree of competition. This would lower the degree of innovation
as well as the improvement of exchange services. As the London
Economics Report states, "competition in the financial
intermediation sector will offer corporations a wider range of
financial products at attractive prices." 218
It should be emphasized that sound and effective regulation is
the key to the development and integration of stock exchanges in
the global market. Effective regulation will provide confidence
and attract investors, allowing stock exchanges to grow and
interact. However, there is no single regulation structure that will
be suitable to all countries. 219 Each country has to develop the
regulatory structure that best suits its need, taking into account
historical, cultural, political, social, and economic issues.
The burden falls on competition/regulation authorities to
ensure that effective and sufficient competition remains after any
consolidation in the stock exchange industry.
217 LONDON ECONOMICS, QUANTIFICATION OF THE MACRO-ECONOMIC IMPACT OF
INTEGRATION OF EU FINANCIAL MARKETS i (
) available at http://ec.europa.eu/
internalmarket/securities/ docs/ studies/ summary-londonecon-en.pdf.
219 Abrams & Taylor, supra note 32, at 27.
2006 /48, Relating to the Taking Up and Pursuit of the Business of Credit
Institutions , Annex 1, 2006 O.J. (L 177) 1 , 57 [hereinafter Capital Requirements
Directive] (indicating that safe custody services are subject to mutual recognition). 9 Matthew J . Clayton , et al., On the Formation and Structure of International
Exchanges 1 (Tinbergen Inst ., Discussion Paper No. TI 99-079/2 , 1999 ). 10 See Sofia B. Ramos, Competition Between Stock Exchanges: A Survey 6 ( Int'l
Ctr. for Fin. Asset Mgmt . & Eng' g, Research Paper No. 77 , 2003 ), available at
http://www.swissfinanceinstitute.ch/rp77.pdf (discussing the development of
competition in the context of stock exchanges) . 11 Id. 12 Id. at 8 . 13 One hundred basis points is equivalent to 1 percent. 14 Ian Domowitz , Liquidity, Transaction Costs , and Rein termediation in Electronic
Markets , 22 J. FIN . SERVICES RES . 141 ( 2002 ). 15 Parliament and Council Directive 2003 /6, On Insider Dealing and Market
Manipulation (Market Abuse) , 2003 O.J. (L 96) 16 [hereinafter Market Abuse
Directive]. 16 Parliament and Council Directive 2003 /71, On the Prospectus to be
Published When Securities are Offered to the Public or Admitted to Trading, 2003
O.J. (L 345) 64 [hereinafter Prospectus Directive]. 17 Parliament and Council Directive 2004 /109, On the Harmonisation of
Securities are Admitting to Trading on a Regulated Market, 2004 O.J. (L 390) 38
[hereinafter Transparency Directive]. 18 Parliament and Council Directive 2006 /49, On the Capital Adequacy of
Investment Firms and Credit Institutions , 2006 O.J. (L 177) 201 [hereinafter Capital
2. 27 In this Article, stock exchange mergers will refer to cross-border stock
exchange mergers. 28 Carmine Di Noia, The Stock-Exchange Industry: Network Effects , Implicit
Mergers , and CorporateGovernance, 33 QUADERNI DI FINANZA 3 , 17 ( 1999 ) (Italy) . 29 Id . 32 Richard K Abrams & Michael W. Taylor , Issues in the Unificationof Financial
Sector Supervision 5 -9 ( Int'l Monetary Fund , Working Paper No. WP/00/213,
2000 ). 33 INT'L ORG . OF SEC. COMM'NS, OBJECTIVES AND PRINCIPLES OF SECURITIES
REGULATION, Annexure 3 ( 2002 ). 34 LASTRA, supranote 20 , at 85 . 35 Crisis management in financial institutions can become something of
Versus Securities Market Regulation 26-27 (Wharton Fin. Insts . Ctr, Working Paper
No. 01 - 29 , 2001 ). 36 See INT'L ORG . OF SEC. COMM'NS, supra note 33 (proposing 30 principles of
securities regulation) . 48 Communication from the Commission to the Council and the European
( 2004 ) 312 final (Apr . 28, 2004 ). 49 See The E.U. Single Market , Financial Markets Infrastructure, Clearing and
indexen. htm (last visited Nov. 2 , 2007 ) (providing access to documents and
settlement) . 50 Proposal for a Directive of the European Parliament and of the Council on
Payment Services in the Internal Market and Amending Directives 97 /7/EC, 2000 /12/EC
and 2002 /65/EC,COM ( 2005 ) 603 final ( Dec. 1 , 2005 ).