THE planned takeover of NYSE Euronext by Germany's Deutsche Boerse has caused concern in the US because it implies ceding the storied trading floor at 11 Wall Street to foreign control.

But in Europe, nationalism such as this is of little import in reviews of the deal. Regulators are focused instead on how to handle a new company that would be the world's largest exchange, and would control vast but rather obscure parts of the financial system.

The deal is putting a spotlight on the sector's transforming business model. Big exchanges are no longer simply places to trade stocks and bonds. They have transformed into one-stop conglomerates that clear and settle trades in derivatives, source and sell their own data, and license the use of coveted indices such as Dax and Stoxx.

Continental European countries will be eager to use the deal to boost Frankfurt's status as a financial center competing with New York, Hong Kong and London. But regulators are also worried about creating a financial behemoth just as they are trying to increase oversight of the sector.

Examination

The US$10 billion takeover is set to affect big banks, investment funds and rival exchanges around the world, making it one of the biggest regulatory cases for the European Union's competition watchdog.

The first deadline for the European Commission's review is today, but the regulator is expected to launch a deeper examination of potential competition threats.

Few observers believe the commission will block the takeover, but many wonder how it will deal with two key issues - the creation of a potentially dominant venue for derivatives trading by combining Deutsche Boerse's Eurex and NYSE Euronext's Liffe, and the consequences of linking this huge derivatives exchange to Deutsche Boerse's integrated business model, in which trades are channeled to its own clearing house.

A clearing house acts as an intermediary between buyers and sellers, collecting fees and collateral to absorb losses in case one party defaults. This function has traditionally been independent of the exchange.

Deutsche Boerse's integration of trading and clearing, plus its lucrative settlement bank and indices business, means it is involved simultaneously in multiple aspects of a trade, streamlining a process whose profits are usually distributed among several companies.

CME Group in the US has already done this and other exchanges are working to build up their own so-called vertical silos. But the takeover of NYSE Euronext would take that practice to a new level, extending it across the biggest exchange in the world.

"Are there monopolistic elements in this formation? Yes," said Diego Perfumo, an exchange analyst at Equity Research Desk in Connecticut.

Domination

However, Perfumo said, the commission will have to look at the merger in a global context, where Europe wants to strengthen Frankfurt as a financial center in the eurozone that can compete for listings from fast-growing Asia.

It will also consider that the CME Group has done exactly what Deutsche Boerse aims to do. It has dominated both derivatives trading and clearing in the US since the company's takeover of the Chicago Board of Trade and the New York Mercantile Exchange.

Derivatives are complex financial products that allow investors to bet on developments in areas such as interest rates, stock indices or commodity prices. The value of outstanding derivatives contracts has surpassed by many times the value of the world's stocks and bonds, a trend that has not been ignored by global regulators.

The vast majority of derivatives, some 80 percent worth about US$600 trillion, are traded bilaterally between big banks and other investment firms over the counter, as the jargon has it. The lack of transparency in this mostly unregulated market became an issue after the collapse of Lehman Brothers, when no one knew who was exposed to the failed bank's debt.

Since then, regulators around the world have worked to push derivatives trading on to exchanges and clearing houses to get a better idea of what is going on in the market and create a safety net when things turn sour.

With their merger, Deutsche Boerse and NYSE want to tap into both these trends. Together, Liffe and Eurex control around 90 percent of the market for some of the biggest exchange-traded derivatives.

But whereas US authorities have accepted CME Group's domination of the US derivatives market, the European market is more fragmented and regulators are concerned the deal will lock out competitors.

The biggest losers would be the London Stock Exchange and Nasdaq-OMX, which have recently failed in their own attempts to grow through takeovers. Banks and funds, meanwhile, fear a dominant exchange could easily raise prices.

In a recent briefing on the merger, the London Stock Exchange wrote: "NYSE Euronext and Deutsche Boerse will be able to leverage their combined market power to consolidate their position of dominance."

The LSE is currently trying to build up its own derivatives trading platform through its subsidiary Turquoise.

Within a day of Deutsche Boerse's and NYSE's notification of their merger to the commission in late June, the regulator sent an extensive questionnaire to the companies' rivals and customers.

The content of this questionnaire indicates that the commission is concerned about more than just a potential monopoly of trading and clearing. It is also examining the control of market data - valuable information on real-time volumes and pricing - and indices, such as Dax and Stoxx, which are controlled by Deutsche Boerse.

Opportunity

Diego Valiante, a financial markets expert at the Centre for European Policy Studies in Brussels, said: "This is a great opportunity for the European Commission to look into a space they have not looked into in the past decade."

The LSE has complained that Deutsche Boerse will not allow Turquoise to offer derivatives based on the Euro Stoxx 50, the leading index for eurozone stocks. Together with other competitors like Nasdaq, it is demanding that Deutsche Boerse start selling licenses for Euro Stoxx 50 and other indices as part of the merger remedies.

Deutsche Boerse has defended its integrated business model, saying it works well for shareholders and customers, and arguing the new super-exchange will need its size to compete in the global derivatives market with CME Group and over-the-counter trading.

While Deutsche Boerse and NYSE Euronext expect the commission to demand remedies, the companies are unlikely to accept any big constraints, such as selling either Eurex or Liffe.

Anything that significantly hurts the model of integrated trading and clearing is likely to be rejected by Deutsche Boerse, according to a source close to the deal who added: "That is the base on which the entire merger is built."