"The Australian Competition and Consumer Commission remains concerned that, based on the information currently available to it, the Australian Stock Exchange's bid for the Sydney Futures Exchange would be likely to substantially lessen competition. It is therefore likely to breach section 50 of the Trade Practices Act (which prohibits mergers which are likely to substantially lessen competition)," ACCC Chairman, Professor Allan Fels, said today.
"On 17 June 1999, the ACCC said that it had significant concerns about the ASX's bid for the SFE. At the ASX's request, the ACCC gave the ASX some time to provide further information. The ASX made an additional submission on 8 July 1999 with further material supplied through until last week. The ACCC has now considered and tested all the information provided. This additional information has not substantially altered its views," he said.
The ACCC undertook extensive market inquiries. It canvassed the views of a wide range of participants, including brokers and investors. The ACCC found that there is a mixed reception to the merger proposal in the market, including negative reactions and concerns about anti-competitive effects.
The ACCC has concerns that the merger would decrease the innovation in financial services markets and delay if not prevent more competitive pricing of financial services products from the combined ASX and SFE.
The ACCC's overall findings remain that: In the absence of the merger, the ASX and SFE are likely to compete strongly in the future. This is especially the case for new products. With new financial instruments being continually devised and, with the market expanding rapidly, the scope for competition between them is likely to increase substantially, especially with the proposed regulatory changes to the Corporations Law. At present the SFE cannot offer equities trading as a separate licence is required, nor can it offer independent electronic clearing and settling services for shares as the ASX's CHESS system is the only such facility approved under the legislation. The proposed regulatory changes will allow each exchange to offer the full range of exchange trading services for financial instruments without any distinction between shares and futures. If the merger proceeds, the result would be the creation of one dominant exchange in all exchange traded financial instruments. Given that the merger is essentially a merger between the only two currently significant firms in the market, at face value this would likely lead to a substantial lessening of competition. The ACCC then had to consider if these concerns would be overcome by the possible entry of a strong competitor, within a reasonable time, which would supply services competitive to those of a merged ASX/ SFE. The ASX submission has not overcome those concerns. On the information available, the ACCC was not satisfied that barriers to entry were not substantial. There are significant costs in establishing trading, clearing and settling facilities that could not be recouped on exit from the industry. The ASX and SFE control the clearing and settling facilities. There are substantial costs involved in establishing alternative settling and clearing systems. However, the ACCC notes access to CHESS is available although, to date, no one has effectively accessed this system. Another barrier is the need for a new entrant to achieve sufficient liquidity. This refers essentially to the volume of trading which directly influences the ease with which customers may buy or sell a product on the exchange, and is a measure of the depth and breadth of trading. The ASX's submissions did not contain material which persuaded the ACCC that substantial foreign competition in the market for the exchanges' services appears likely within the foreseeable future. Foreign exchanges will not be able to compete effectively in the domestic market due to differing national laws regulating entry, market integrity and investor protection. Brokers and institutional investors appear to be unlikely to set up a competing exchange. These groups have little incentive to establish rival trading mechanisms given their primary focus on broking and investment. Broking groups and their employees are major owners of the ASX and would have little incentive to compete with an organisation in which they have equity. The merger proposal may be a defensive one to hinder the competitive effects of dynamic factors such as regulatory change, technology, and innovation that may otherwise be realised in the future. The ACCC recognises that there are significant new and dynamic changes occurring in financial markets but is concerned that the merger proposal may prevent these developments and stifle potential competition if they have a detrimental impact on the dominant position of the ASX.
"The ACCC has recently been contacted by Gresham Investment House, which is preparing a submission on behalf of ten SFE brokers," Professor Fels said. "Gresham has requested that the ACCC consider its submission before coming to a final conclusion. The ACCC notes that the proposed acquisition was announced by the parties in April and that other interested parties were contacted by the ACCC to make submissions. Gresham was appointed on 19 July to prepare a submission which it undertook to provide to the ACCC by 11 August. Nevertheless, the ACCC will take Gresham's submission into account when it is submitted.
"The ACCC is considering this merger proposal under section 50 of the Trade Practices Act 1974. I note that some issues raised by the parties and others are outside the scope of an assessment under section 50," Professor Fels said.
APPENDIX
The ACCC has undertaken extensive analysis of the market for exchange traded financial instruments since the ASX and SFE announced their intention to merge in April 1999. The ACCC provided its preliminary view in June 1999 that the proposal would be likely to breach section 50 of the Trade Practices Act. The ASX requested that the ACCC delay its decision and that it be given additional time to provide more information to the ACCC. The ACCC agreed to this request and the ASX provide this additional material in stages through until last week.
The ACCC has also been requested, more recently, by Gresham Investment House, on behalf of a number of major SFE brokers, to further delay its decision, to enable Gresham to provide information which it considers relevant to the ACCC deliberations. The ACCC is concerned that these requests for delay may create undue market uncertainty and consequently states its view based on the information currently available. The ACCC notes that Gresham expects to be able to provide the ACCC with information by mid August.
