Suing the Lawmakers: Deutsche Börse Takes on Brussels

One of the more eye-catching headlines this week is that Deutsche Börse will begin proceedings against the European Commission for blocking its proposed merger with NYSE Euronext.

The exchange says—perhaps fairly—that it disagrees with several aspects of the ruling, although it declines to say which ones. The smart money is on the definition of derivatives markets, specifically the exclusion of over-the-counter (OTC) trades from the decision that the combined entity would have a quasi-monopolistic hold over European activity in these areas. Competition from non-European exchanges was also dismissed, which Deutsche Börse says is unfair. In a press conference shortly after the ruling was made, CEO Reto Francioni said the decision marked a "black day" for Europe.

Lone Ranger
Interestingly, NYSE Euronext isn't taking part in the litigation, leaving Deutsche Börse to go it alone against the Commission. A spokesman says it has not yet decided what course of action to take. Reading between the lines, the implication is that NYSE wants to leave this episode behind and move on.

It is unclear whether Deutsche Börse’s move is more of a publicity stunt or an attempt to recoup some losses from the deal rather than a genuine attempt to change the decision. The Commission has said that it stands by its decision, and will defend it in court if necessary.

Litigating Legislation
This isn't the first instance of a governmental body being sued over financial services-sector decisions of late, either. In July 2011, a US federal court struck down the Securities Exchange Commission's (SEC’s) proxy rule after a challenge from industry groups. In December 2011, the Securities Industry and Financial Markets Association (Sifma) and the International Swaps and Derivatives Association (ISDA) filed a lawsuit against the Commodity Futures Trading Commission (CFTC) regarding its position limits rules.

Competition commissions for corporate mergers and wholesale regulatory reform are different beasts, of course, but this new wave of litigious sentiment toward legislative bodies is interesting. Does it signal a shift in approach from backroom lobbying and continuous ex-parte meetings with regulators and comment letters, to discussions in court? Only time will tell, but I find it unlikely. Influencing legislation is one thing; butting heads with it is quite another, and the cards are usually stacked in the house’s favor, in these instances. Even the more controversial aspects of macro regulation, such as the Volcker Rule, are more likely to cause mass grumbling than outright court orders.

That being said, it's always a possibility. But provoking supreme authorities and, as CFTC Commissioner Bart Chilton famously said, “dancing on the head of a legal pin,” carries its own risks.

If anyone would like to discuss regulatory challenges, please feel free to call me on +44 207 316 9811 or e-mail me on james.rundle@incisivemedia.com.