[LONDON] Deutsche Boerse AG's chief executive officer plans to pitch the takeover of London Stock Exchange Group Plc as Frankfurt's only chance to win a key euro-denominated business, according to people familiar with his discussions.
Carsten Kengeter's renewed push to win over German officials and investors comes amid a post-Brexit tussle between European leaders over which city should become the new center for clearing euro-denominated trades. The majority of euro clearing currently happens in London, but the UK's eventual departure from the European Union has put that business up for grabs. Cities such as Paris are wrangling to win it.
The city that dominates euro clearing could attract the other major currencies, said one of the people, who asked not to be identified because the discussions are private. Representatives at LSE and Deutsche Boerse declined to comment.
German officials have objected to the prospect of Deutsche Boerse moving the headquarters of its holding company to London as part of the tie-up. Kengeter's pitch suggests there is a bigger issue: the deal could be the only way to protect the viability of Frankfurt's existing clearing business.
Management at Deutsche Boerse and LSE both understand the need to find a compromise on the new holding company's location, separate people familiar have said. That may entail establishing the headquarters outside the UK to obtain approval for the merger, or even creating dual holding companies. Such a move would only come after Deutsche Boerse's tender offer succeeds and the deal is completed, the people said.
In a near-unanimous vote, LSE shareholders approved the merger on Monday. Deutsche Boerse investors have until July 12 to tender their shares.
German Finance Minister Wolfgang Schaeuble said July 6 that Deutsche Boerse should remain subject to EU rules if the LSE deal goes ahead. The location of the company's headquarters is less important than where the business operations take place, he said.
Clearinghouses have been embraced by regulators since the 2008 crisis, and big trading companies are increasingly required to use them. They stand between buyers and sellers, holding collateral from both, in case a member defaults.
Much of London's clearing of euro-denominated derivatives happens at LCH. The company is majority owned by LSE and has cleared US$356 trillion of swaps derivatives this year. About US$115 trillion is denominated in euros. Deutsche Boerse's Eurex division clears about US$18.8 trillion every month.
If the deal doesn't happen, LCH has a French unit, which could also theoretically house euro-denominated clearing if the EU forced operations to move.