Frankfurt deal is Brexit-proof say exchanges

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LONDON Europe's biggest financial exchanges said on Friday their proposed merger is effectively bullet-proofed against a British vote on European Union membership.

London Stock Exchange (LSE.L) and Deutsche Boerse (DB1Gn.DE) have set up a committee to advise on the implications of the UK's June 23 "Brexit" vote, but said their politically sensitive merger proposal would prosper regardless.

"(It) would be well positioned to serve global customers irrespective of the outcome of the vote...the outcome of the referendum would not be a condition of the potential merger," they said in a statement, despite warning a vote by Britons to leave would put the EU's Capital Markets Union project at risk.

A deal would combine the LSE's share-trading operation with the derivatives trading of Deutsche Boerse's Eurex in a group worth almost $30 billion. It would propel the companies to a similar scale as U.S. exchange ICE (ICE.N), which has taken a huge slice of the European derivatives markets.

If Britons were to vote to leave the EU, then even if trading volumes in stocks and other instruments moved out of London the likely beneficiary would be Frankfurt, giving a combination of the exchanges an effective hedge.

Tuesday's friendly deal between LSE and Deutsche Boerse follows two failed attempts to join forces in the past 16 years.

Both are confident this time is different.

The proposal is effectively a takeover of the LSE by its German rival at a time when Britain is concerned about a loss of influence to the continent if it leaves the EU.

Peter Thorne, analyst at Edison Investment Research, agreed a Brexit vote was unlikely to impact the deal as the financial infrastructure business and regulation are increasingly global.

"But Brexit is a political process so financial logic may not be the only concern. The referendum committee seems a necessary precaution," he said.

A source familiar with the deal said it had been structured to support LSE in the event that a "Brexit" triggered a move by the European Central Bank to prevent euro-denominated products like bonds being cleared outside the euro zone.

This would hit LSE's LCH.Clearnet business.

"The referendum committee seems a necessary precaution," he said.A source familiar with the deal said it had been structured to support LSE in the event that a "Brexit" triggered a move by the European Central Bank to prevent euro-denominated products like bonds being cleared outside the euro zone.This would hit LSE's LCH.Clearnet business"

"These products could then be cleared at other parts of the company," the source said.

Shares in LSE were up 1.7 percent at 1028 GMT (05:28 a.m. EST), outperforming a 0.8 percent stronger FTSE midcap index .FTMC, while Deutsche Boerse was up 0.7 percent, lagging a 2.3 percent firmer DAX index .GDAXI.

RETIRING ROLET

Getting a deal done is a political tight-rope walk, with one major sensitivity the issue of where the combined exchange would be based and who would lead it.

On Friday the exchanges confirmed the LSE's long-standing Chief Executive Xavier Rolet would step down in favor of Deutsche Boerse peer Carsten Kengeter.

Joining him in the boardroom would be LSE Chairman Donald Brydon and Chief Financial Officer David Warren, both of whom would retain their positions in the new company.

While the firm's main domicile would be in Britain, with a primary listing on the blue-chip FTSE 100 .FTSE, it would also have a home on the Frankfurt Stock Exchange and have corporate headquarters in both cities.

The impact on Frankfurt as a financial center was too early to say as negotiations between the firms are ongoing, a spokesman for the city's mayor Peter Feldmann told Reuters.

He said Kengeter had informed Feldmann of the deal at the start of the week.

While offering no comment on the decision to domicile the firm in London, the spokesman warned the exchanges needed to "make sure that their talks aren't detached from politics".

The exchanges gave few further details on their plans in Friday's statement but said cost synergies would be principally from removing duplication of technology and operations across business lines, with the impact "distributed in a balanced manner across the two companies".

(Additional reporting by Huw Jones and Anjuli Davies in London and Peter Maushagen and Andreas Kroener in Frankfurt; Editing by Keith Weir and Alexander Smith)