[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
COMPETITION AND CONSOLIDATION IN FINANCIAL MARKETS: THE NYSE-DEUTSCHE
BOERSE MERGER
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
INTELLECTUAL PROPERTY,
COMPETITION, AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JUNE 13, 2011
__________
Serial No. 112-42
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
_______
U.S. GOVERNMENT PRINTING OFFICE
66-885 PDF WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON THE JUDICIARY
LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
[Vacant]
Sean McLaughlin, Majority Chief of Staff and General Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------
Subcommittee on Intellectual Property, Competition, and the Internet
BOB GOODLATTE, Virginia, Chairman
BEN QUAYLE, Arizona, Vice-Chairman
F. JAMES SENSENBRENNER, Jr., MELVIN L. WATT, North Carolina
Wisconsin JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
STEVE CHABOT, Ohio JUDY CHU, California
DARRELL E. ISSA, California TED DEUTCH, Florida
MIKE PENCE, Indiana LINDA T. SANCHEZ, California
JIM JORDAN, Ohio JERROLD NADLER, New York
TED POE, Texas ZOE LOFGREN, California
JASON CHAFFETZ, Utah SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas MAXINE WATERS, California
TOM MARINO, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
SANDY ADAMS, Florida
[Vacant]
Blaine Merritt, Chief Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
----------
JUNE 13, 2011
Page
OPENING STATEMENTS
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Subcommittee on
Intellectual Property, Competition, and the Internet........... 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Intellectual Property, Competition, and the Internet........ 3
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Ranking Member, Committee on the
Judiciary, and Member, Subcommittee on Intellectual Property,
Competition, and the Internet.................................. 3
WITNESSES
Lawrence Leibowitz, Chief Operating Officer, NYSE Euronext
Oral Testimony................................................. 6
Prepared Statement............................................. 9
Gary Katz, President and Chief Executive Officer, International
Securities Exchange
Oral Testimony................................................. 17
Prepared Statement............................................. 19
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, Ranking
Member, Committee on the Judiciary, and Member, Subcommittee on
Intellectual Property, Competition, and the Internet........... 5
COMPETITION AND CONSOLIDATION IN FINANCIAL MARKETS: THE NYSE-DEUTSCHE
BOERSE MERGER
----------
MONDAY, JUNE 13, 2011
House of Representatives,
Subcommittee on Intellectual Property,
Competition, and the Internet,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 4:04 p.m., in
room 2141, Rayburn Office Building, the Honorable Bob Goodlatte
(Chairman of the Subcommittee) presiding.
Present: Representatives Goodlatte, Coble, Chabot, Marino,
Adams, Watt, Conyers, Deutch, and Nadler.
Staff present: (Majority) Holt Lackey, Counsel; Lindsay
Hamilton, Clerk; and (Minority) Stephanie Moore, Subcommittee
Chief Counsel.
Mr. Goodlatte. Good afternoon. The Subcommittee will come
to order.
I want to welcome you to today's hearing on ``Competition
and Consolidation in Financial Markets: The New York Stock
Exchange-Deutsche Boerse Merger.'' I would especially like to
welcome our witnesses and thank you for joining us today.I21I
am joined today by my colleague from North Carolina, the
distinguished Ranking Member of the Subcommittee, Melvin Watt,
and I think we are expecting the Ranking Member of the full
Committee, Mr. Conyers of Michigan.
In mid-February, the New York Stock Exchange Euronext and
Germany's Deutsche Boerse announced a merger that would give
Deutsche Boerse 60 percent ownership of the company that will
own the New York Stock Exchange. Many Americans greeted the
news that the big board of the New York Stock Exchange would
merge under the umbrella of a foreign company with
understandable apprehension. Would this merger harm competition
in exchange markets and what does the merger say about the
future of America's role in the international financial system?
This Subcommittee held a hearing on these issues on April 1
of this year because NASDAQ and the Intercontinental Exchange
announced a competing offer for NYSE on the morning of the
hearing. We were not able to take testimony from the merging
parties at that time. Instead, we proceeded with a panel of two
distinguished experts in exchange markets, Professor Larry
Harris of the University of Southern California and Professor
Mercer Bullard of the University of Mississippi.
Today, we continue and complete our hearing taking
testimony from representatives of NYSE and Deutsche Boerse.
This hearing provides an opportunity for the merging companies
to respond to the issues and concerns that have been raised in
the public discussion of this merger and in this Subcommittee's
previous hearing.
As discussed at our previous hearing, there are horizontal
elements to this merger in both the American and European
markets. Deutsche Boerse's subsidiary, the International
Securities Exchanges, is the largest shareholder in Direct
Edge, the fourth largest securities exchange in America. The
merger would combine Deutsche Boerse's share of this fourth
largest exchange with America's largest securities exchange,
the New York Stock Exchange.
The Committee wants to also ask whether this combination
will threaten the robust competition in securities exchange
markets that has reduced trading costs over the past 2 decades.
We must also consider the possibility that the combination of
the two companies' American equity options exchanges will give
the new company market power over the traders or over the
options clearing corporation. The merger will combine the third
and fourth largest equity option exchanges in America, the New
York Stock Exchange's AMEX and Arca exchanges with Deutsche
Boerse's International Securities Exchange. Combined, the new
entity will control three of the nine American-based equity
options exchanges and a larger share of the American equity
options market than any other company.
This hearing will examine whether these combinations
threaten competition among American securities and options
exchanges.
The merger will also combine the two largest derivatives
exchanges in Europe, Deutsche Boerse's Eurex and NYSE's Liffe
Exchanges. If American consumers will be harmed by
anticompetitive effects from this combination, then this
Committee and the Department of Justice must take notice.
This Committee and the Department of Justice should also
consider the efficiencies that the merging parties hope to gain
from this merger and how those efficiencies may enable them to
compete more effectively.
Finally, the hearing will consider how the merger might
affect the worrisome trend away from American companies
offering their shares for public trading on America's stock
exchanges. In the 1990's, the United States averaged 530
initial public offerings per year. In the 2000's, that average
fell to 126 IPO's per year. This hearing will explore whether
the merger of America's largest stock exchange, indeed, the
world's largest stock exchange by trade volume, into a European
company will affect competition in a way that speeds or slows
these trends.
The United States, and New York City in particular, has
been at the center of international finance for over a century.
How will this merger affect America's ability to compete
successfully in global financial markets in the next century?
The Department of Justice is currently reviewing this
merger to address these very questions. The Department should
conduct a thorough review, based on sound economic legal
principles, and intervene if it determines that the merger will
substantially lessen competition. Congress has an oversight
responsibility to ensure that the Department of Justice
conducts its merger reviews in a thorough, fair, and reasonably
prompt fashion.
I look forward to today's hearing which raises fascinating
and important questions about the future of vibrant and
competitive financial markets in America.
And it is now my pleasure to yield to the Ranking Member of
the Subcommittee, the gentleman from North Carolina, Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman.
Mr. Chairman, on the eve of the first hearing on this
proposed merger, NASDAQ and Intercontinental Exchange, both
publicly traded Delaware corporations, announced a joint bid to
acquire the New York Stock Exchange. Because of that
development, Chairman Goodlatte appropriately decided to
release the two witnesses who appear before us today from
presenting testimony at that hearing.
The Department of Justice conducted a review of that
proposed NASDAQ merger and concluded that because the New York
Stock Exchange and NASDAQ are the only competitors in several
businesses that are essential to the success of our equity
markets and the only providers of certain stock option
services, consummation of that proposed merger would have
effectively eviscerated all competition in those areas.
NASDAQ and ICE subsequently withdrew their bid.
Competition is a necessary and indispensable element of a
vibrant and fair marketplace, one that fosters economic growth
and protects consumers. But as I noted in our last hearing, I
do not believe that we should put our fingers on the scales to
tip the balance in favor of or against a proposed merger. The
Department of Justice quickly and aggressively responded to the
proposed NASDAQ bid to ensure that no anticompetitive effects
were visited upon our markets.
By all accounts, the Department of Justice and the European
authorities stand ready to aggressively evaluate whether the
proposed merger of the New York Stock Exchange and Deutsche
Boerse will create a monopoly in the derivatives market or
result in any other antitrust violations. If so, I am confident
that the proposed merger will be stopped.
I welcome the witnesses and thank them for returning.
And I yield back.
Mr. Goodlatte. I thank the gentleman.
The Chair now is pleased to recognize the Ranking Member of
the full Judiciary Committee, the gentleman from Michigan, Mr.
Conyers.
Mr. Conyers. Thanks, Chairman Goodlatte and Ranking Member
Watt.
I agree with everything that you have said.
Now, we have experienced this question of mergers that
create more difficulty than anything else. We have all heard of
the ``too big to fail'' notion, and so we come here this
afternoon to listen to the leaders of two huge businesses to
have them explain to us why we don't have to worry about ``too
big to fail.'' As big as they are, they get bigger by coming
together maybe.
Financial giants that were too big to fail pushed our
Nation to the brink of an economic meltdown that we are still
not out of, a recession that is still ongoing, causing pain and
suffering to millions of Americans that didn't get a bailout,
that didn't get TARP, that didn't receive a stimulus.
And here is another problem. The United States Supreme
Court has not been particularly helpful with their Citizens
United decision last year in which they have given corporations
a blank check to use their money any way they want, as much of
it, and without even revealing who gave it and who got it. And
I am worried about that. You didn't cause that. But you are
going to be good citizens and go along with the Federal courts,
and I have no idea what you are going to do with the money
publicly or privately. And as corporations in this country
become larger and more consolidated and global, their influence
is disproportionately large in the elections that are the base
of an American democracy.
Now, over the last 15 years, 5,400 bank mergers occurred,
including the mega-mergers. That is where you come in; where
each buyer and seller had more than $10 billion in assets.
Because of these mergers, the percentage of banking assets and
deposits held by the 10 largest banks more than doubled, rising
to 55 percent and 45 percent respectively.
So we come together this afternoon to consider another
merger. As Mel Watt observed, the Obama administration opposed
the NASDAQ-New York Stock Exchange merger. The Assistant
Attorney General of Antitrust in the Department of Justice
viewed the proposed union as a potential monopoly that would
lead to higher prices, inferior service, and less innovation.
The Justice Department found that the acquisition would have
removed incentives for competitive pricing, high quality of
service, and innovation in the listings, trading, and data
services that these exchange operators provide to the investing
public.
I have hopes that the current Administration will continue
to review critically these mega-consolidations with the
heightened scrutiny that they bring to this.
May I have an additional minute, Mr. Chairman?
Mr. Goodlatte. Without objection, the gentleman is
recognized for an additional minute
Mr. Conyers. Thank you.
Unfortunately, the proposal for Deutsche Boerse to acquire
New York Stock Exchange still stands, which is why we are here
today.
My concern about this merger is the immense market
capitalization that would result--I don't see any benefit for
consumers. Maybe some of you can suggest some to me--and the
stifling effect it could have on innovation and transparency.
A horizontal merger between New York Stock Exchange and the
German company would, obviously, create the largest stock and
derivative exchange in the world. The resulting market
capitalization resulting from this merger would easily exceed
$25 billion. Given the significant changes in the market from
paper traded on the exchange floor to international electronic
transactions, our analysis of this merger must consider the
impact the transfer of financial instruments and the effect of
such a transfer would have on our Nation's economy.
Since the Chairman is giving me the evil eye----
Mr. Goodlatte. It is actually a very patient eye.
Mr. Conyers. It is my choice to submit the rest of my
statement. Thank you.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Ranking Member, Committee on
the Judiciary, and Member, Subcommittee on Intellectual Property,
Competition, and the Internet
The effects of consolidation--particularly among the media,
transportation and financial services industries--have long been of
concern to me. When businesses consolidate ostensibly to increase
efficiencies, they always result in job cuts, reduced worker benefits,
and fewer choices for consumers.
I was very disappointed in the Bush Administration for failing to
object to mergers that many observers believed had the potential to
impose significant anti-competitive harm.
We experienced this firsthand with the creation of ``Too Big to
Fail'' financial giants that with their collapse pushed our Nation to
the brink of an economic meltdown, and a recession that is still
causing pain and suffering to Americans.
Moreover, in the wake of the Citizens United decision (2010), the
Supreme Court gave corporations a blank check to air an unlimited
number of electioneering ads. As corporations become larger and more
consolidated, their disproportionate influence in federal elections
also grows.
More than 5,400 bank mergers occurred between 1990 and 2005. Those
mergers included 74 ``mega-mergers'' where the buyer and seller each
had more than $10 billion in assets.
Because of those mergers, the percentage of banking assets and
deposits held by the ten largest banks more than doubled, rising to 55%
and 45%, respectively.
We all know the rest of that story. So I am particularly troubled
when I hear about more proposed mergers within this industry.
Accordingly, I was very pleased that the Obama Administration
opposed the planned merger of NASDAQ and the New York Stock Exchange,
which was proposed just a few hours before our last hearing on this
issue last April.
Indeed, according to Assistant Attorney General Christine Varney of
the Antitrust Division, the Justice Department viewed that proposed
union as ``a potential monopoly that would lead to higher prices,
inferior service, and less innovation.''
I agree with the Justice Department that the acquisition would have
removed incentives for competitive pricing, high quality of service and
innovation in the listings, trading and data services that these
exchange operators provide to the investing public.
I hope that the current Administration will continue to review
mega-consolidations with an appropriately heightened level of scrutiny.
Unfortunately, the proposal for Deutche Bourse to acquire the New
York Stock Exchange (NYSE) still stands, which is why we are here
today.
I am concerned about this merger is the immense market
capitalization that would result, the harm that it will impose on
consumers, and the job market, and the stifling effect it may have on
innovation and transparency.
A horizontal merger between the New York Stock Exchange and the
German company, Deutshe Boerse, would create the world's largest stock
and derivative exchange.
The resulting market capitalization resulting from this merger
would exceed $25 billion.
Given the significant changes in the market--from paper traded on
the exchange floor, to international electronic transactions--our
analysis of this proposed merger must consider the impact the transfer
of financial instruments and the effect such a transfer would have on
our Nation's economy.
It is absolutely critical that we maintain the competitiveness and
vitality of American exchange markets. A mistake here could ruin the
valuations of businesses around the world, undermining their ability to
raise funds and operate.
This merger will affect not only how the stock markets function on
a national basis, but also on an international basis.
These exchanges are very complex because they involve businesses
with wide-reaching application in security exchanges, derivatives
exchanges, option exchanges, listing services, data services and
technology services.
This deal could affect the ability of small companies and start-up
firms to access greatly needed capital.
Moreover, if this merger goes through, it could lead to another
round of consolidation further concentrating the market.
Finally, it is my intention to invite progressive economists to
review the impacts of this proposed merger. In particular, I plan to
reach out to those individuals who prioritize the interests of
Americans over those who simply favor conglomeration.
__________
Mr. Goodlatte. Well, the Chair appreciates that, and
without objection, all other opening statements will be made a
part of the record.
And we will now turn to our witnesses. Before I introduce
our witnesses, as is the custom of this Committee, I would like
to ask them to stand and be sworn.
[Witnesses sworn.]
Mr. Goodlatte. Thank you and please be seated.
Our first witness is Larry Leibowitz, Chief Operating
Officer of NYSE Euronext, the parent company of the New York
Stock Exchange. Mr. Leibowitz has been with NYSE for 4 years in
various roles, and before joining the NYSE, he held executive
positions at UBS and Schwab. He has served on many industry
boards and committees, among them the Market Structure
Committee of the Security Industry and Financial Markets
Association.
Our second witness testifying on behalf of Deutsche Boerse
group is Gary Katz, President and Chief Executive Officer of
the International Securities Exchange, an American equity
options exchange controlled by Deutsche Boerse. Mr. Katz is
also a member of Eurex, the derivatives arm of Deutsche Boerse
and Direct Edge Holdings LLC which operates the Direct Edge
securities exchange. His positions at the International
Securities Exchange and Direct Edge make Mr. Katz the executive
most intimately familiar with Deutsche Boerse's current
American operations.
Each witness has written statements, which will be entered
into the record in their entirety, and I ask that each witness
summarize his or her testimony in 5 minutes. To help you stay
within that time limit, there is a timing light on your table.
When the light switches from green to yellow, you will have 1
minute to complete your testimony. When the light turns red, it
signals that your time is up.
And we will start with Mr. Leibowitz. Welcome.
TESTIMONY OF LAWRENCE LEIBOWITZ,
CHIEF OPERATING OFFICER, NYSE EURONEXT
Mr. Leibowitz. Good afternoon, Chairman Goodlatte and
Members of the Subcommittee. On behalf of our company and our
shareholders, I would like to thank you for giving me the
opportunity to testify today.
NYSE Euronext is the world's leading exchange group. For
219 years, we have been the home to the world's premier
companies and, I humbly submit, a global symbol for trade,
commerce, and free markets. We are committed to maintaining
this iconic stature and that is why I am here today to talk
about the future of our business.
We at NYSE Euronext appreciate the Subcommittee's interest
in our proposed merger with Deutsche Boerse. We are grateful
for the chance to talk to you about it today and answer any
questions you may have, we believe it is critically important
to our continued role as one of the world's foremost exchange
groups.
We know what the New York Stock Exchange means to all of us
as Americans. For more than 2 centuries, businesses have come
to us to raise capital they need to expand their businesses,
create jobs, and invest in new ideas. It is also a place where
Americans can invest in great global companies, where
retirement savings can grow and opportunity abounds. Indeed,
the facade of the New York Stock Exchange is one of the most
recognized emblems of American capitalism.
But in reality, the NYSE today is not the NYSE of nostalgic
yesteryear. If we look back as recently as 2006, we were a not-
for-profit member-owned business primarily focused on listing
and trading large cap U.S. stocks. In just 5 short years, the
exchange went public, expanded in size, scope and geography,
through mergers with Euronext, Archipelago, the American Stock
Exchange, and several technology companies, all while facing
significantly increased competition brought on by major
regulatory changes in Europe and the U.S. Like many American
companies, we have met these challenges through innovating,
diversifying, and globalizing because otherwise we would have
been doomed to become a charming but irrelevant anachronism.
Today we are headquartered in New York and Paris. We
operate 13 venues in six countries, derive 49 percent of our
revenues from outside the United States, generate 33 percent of
our revenues from derivatives trading rather than traditional
equities businesses, and are a significant provider of
sophisticated technology for clients.
Our proposed merger is simply a continued reflection of how
we must adapt and change in order to remain a leader among
exchanges, a fierce competitor that services the needs of its
clients, and an advocate for transparency and fair play.
In the U.S. alone, there are currently 13 stock exchanges
and over 30 so-called dark pools. In the options market, the
U.S. competitive landscape is equally complex with nine options
venues aggressively vying for business. As a result of this
intense competition, trading fees for both equities and options
have fallen substantially over the last 10 years while trading
volumes have grown. Our merger will not impact this competitive
dynamic in any way.
Today, domestic companies listing on the New York Stock
Exchange represent $14.5 trillion of market capitalization,
more than the next three biggest exchanges in the world
combined. However, despite its historical positions in the
listings market, NYSE Euronext itself has a market
capitalization of only $9 billion and prior to the merger
announcement ranked sixth among exchanges, significantly behind
the Hong Kong Stock Exchange and CME Group, each more than
double our size, and also behind others such as BM&F Bovespa in
Brazil and the Intercontinental Exchange. This reflects the
fact that derivatives, faster growing markets, and exchanges
protected by regulation are higher margin businesses, but it
also means that these larger players are better positioned for
future consolidation as markets develop further in other
regions.
With this merger, we will become a leader in the global
derivatives market, which is particularly important now as
regulators around the world seek enhanced transparency and risk
management. Additionally, a more consolidated clearing and
settlement infrastructure will make it easier for market
participants to clear and settle trades across global markets,
provide capital efficiencies for clients, and help to provide
transparency and lessen systemic risk.
This transaction will also enhance the ability of our
already global listings venue to attract issuers from emerging
markets. Last year, NYSE ranked third in initial public
offering proceeds. The other three of the top four exchanges
were Chinese. The proposed new entity will bolster our ability
to compete in Asia, Eastern Europe, South America, and other
international markets. This will also allow us to continue our
leadership in advocating for responsible corporate governance
standards.
And finally, we believe the merger will be a catalyst for
innovation, combining complementary market data and analytics,
index, and technology services businesses. Clients will be able
to connect to more markets globally in a more cost-efficient
way.
With all this talk of change, I want to spend one moment to
talk about what will remain the same.
We will continue to have one of our two headquarters in New
York, and the CEO of the company will be based in New York. The
management team will be evenly split between the two firms. We
will continue to be a global company with a majority of the
shareholder base in the United States. And furthermore, the New
York Stock Exchange trading floor, the physical building, and
the name on the facade will not change.
Finally, the combined companies' U.S. markets will continue
to be subject to full U.S. regulatory supervision, as they are
today.
This transaction represents the future of exchanges
because, as I have described, this is an intensely competitive
business, and markets will globalize with or without us.
Today's markets and venues, some of whose regulatory
obligations and transparency significantly lag behind ours,
will continue to grow in strength and influence as the world
becomes ever more connected and interdependent.
Thank you again for allowing me to appear today, and I am
happy to answer questions you may have.
[The prepared statement of Mr. Leibowitz follows:]
__________
Mr. Goodlatte. Thank you, Mr. Leibowitz.
Mr. Katz, welcome.
TESTIMONY OF GARY KATZ, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
INTERNATIONAL SECURITIES EXCHANGE
Mr. Katz. Thank you, Chairman Goodlatte, Ranking Member
Watt, and Members of the Subcommittee. Thank you for the
opportunity to testify before you today on behalf of Deutsche
Boerse Group regarding the proposed merger between NYSE
Euronext and Deutsche Boerse.
As President and CEO of the International Securities
Exchange, also known as ISE, I would like to provide you first
with some background about ISE and how I came to represent
Deutsche Boerse here today.
I co-founded ISE in 1997, along with David Krell and two
E*Trade executives. Our vision was to launch an all-electronic
options market to introduce competition to the U.S. options
industry. In founding ISE, we embraced change and looked to
deliver a new model for options trading that would vastly alter
the competitive landscape.
Following our launch, ISE grew rapidly, and in 2007, ISE
was acquired by Eurex, the derivatives arm of Deutsche Boerse.
With that transaction, we became part of a leading global
exchange organization.
As President and CEO of ISE, I hold positions within the
Deutsche Boerse governance structure as a member of the
executive boards of Eurex and Eurex Clearing. Likewise, my ISE
co-founder, David Krell, is a member of the supervisory board
of Deutsche Boerse Group.
As an entrepreneur, there is always trepidation in giving
up ownership of a business you have built from scratch. Of
course, I had those feelings when Deutsche Boerse acquired ISE.
However, I can assure that ISE's experience as part of Deutsche
Boerse Group has been overwhelmingly positive.
Of importance to this Subcommittee, ISE continues to be a
U.S. registered securities exchange regulated by the Securities
and Exchange Commission, just as we have been since our
registration 11 years ago. The SEC must approve any changes
regarding new products, fees, exchange functionality, or market
structure. Likewise, the membership requirements of our
exchange remain the same. Only U.S.-registered broker-dealers
are permitted to be ISE members.
Implementing a strategy that allows your business to grow
and improve its competitive position is the best job security
any management team can provide their employees. That belief
was proven true with ISE and this merger provides the same
opportunity for the respective employee teams. The synergies
that ISE realized from our partnership with Deutsche Boerse
only made us stronger.
For example, ISE and Deutsche Boerse jointly developed a
new trading technology for ISE's options exchange. It will
position us better for the ever-more competitive U.S. options
industry.
Given the broader focus and diversity of NYSE Euronext, the
benefits of the proposed combination are on a much larger
scale. This merger will create an exchange group with a large
domestic and international footprint, positioned to jointly
expand into emerging markets and new asset classes and to
implement a strategy that will allow our business to thrive.
This will strengthen the competitive position of both New York
and Frankfurt as financial centers, to the benefit of the U.S.,
European, and global capital markets.
The scale and scope of the combination of Deutsche Boerse
and NYSE Euronext will enable each individual exchange to draw
upon the resources of the parent company to deliver a more
competitive offering to its customers. For example, we expect
to maintain three U.S. options exchanges within the new group
structure, providing a targeted value proposition to all of our
clients. In the options industry, this intense competitive
dynamic has resulted in the highest level of customer service,
the greatest transparency, and the lowest commissions in its
history.
This proposed combination creates a platform for continued
growth, creates the world's premier global exchange group and
an iconic venue for capital-raising and for the trading of
equities and derivatives. Most importantly, our customers will
benefit from the global scale, product innovation, operational
and capital efficiencies that our combination will deliver.
Simply put, the combination of Deutsche Boerse and NYSE
Euronext offers a unique, short- and long-term set of benefits
for all of our constituencies, shareholders, employees,
regulators, and most importantly, our customers, both the
retail and institutional investors.
Thank you for the opportunity to testify before you today,
and I am happy to take your questions.
[The prepared statement of Mr. Katz follows:]
__________
Mr. Goodlatte. Thank you, Mr. Katz.
And I will begin the questions, the first one directed to
you, Mr. Leibowitz.
The expert testimony at the previous hearing suggested that
derivatives are a more profitable line of business for
exchanges than securities because derivative exchanges are
vertically integrated and less competitive. Specifically, the
firm that clears the derivatives also provides the exchange
venue for trading those derivatives.
Do you agree that this so-called vertical silo model is the
main reason that derivative exchanges make higher profits than
securities or equity options exchanges? And if so, do
derivative exchanges need to be made more competitive?
Mr. Leibowitz. I think it is a really good question.
I think there are really two reasons why derivatives are
more profitable. One is there are significant efficiencies in
lower clearing costs from the vertical model and that helps
drive better efficiency and more profitability. And then second
of all, I think that the popularity of derivatives has grown
far more than equities in terms of the growth to business. So
there is more growth to the business which leads to more
profits. And I think that that trend is due to continue for the
foreseeable future. So between those two factors, I think that
is why it is more profitable.
Mr. Goodlatte. The number of U.S. stock listings has
decreased by 40 percent since 1997 with about 3,700 fewer
companies trading on U.S. exchanges than at the late 1990's
peak. U.S. IPO's are down 71 percent from the 1990's. About 1
in 10 American companies that goes public now does so on a
foreign exchange. Last year alone, 10 American companies went
public abroad compared with only two American companies that
went public abroad in the entire decade of the 1990's.
How will merging the New York Stock Exchange into a
European entity affect these worrisome trends?
Mr. Leibowitz. Sure. It is a great question. I think it
concerns all of us as Americans, as it should.
First, I think to the delistings. I think many companies
have delisted over the last 10 years. When you combine the
Internet bubble and the financial crisis, that led to a lot of
companies that either had come out too soon when they really
weren't viable companies or companies that went through the
crisis and couldn't weather it being delisted.
In terms of new listings, particularly American listings
going abroad, I think there is really one main driver there,
and that is they can't meet the listing standards in the United
States. Either they don't want to comply with the governance
standards that we have or other aspects that come with listing
on a securities exchange in the United States, and they are
opting for more lax standards other places. That is something
that, obviously, we have to look at--the regulators need to
make sure that we hold ourselves to a high standard, but some
companies don't want to follow that. We have to decide at some
point what is the right balance.
In addition, there have been some challenges in the United
States with going public. In terms of the last 10 years it has
been difficult for small companies, and small companies going
public have faced challenges getting access to capital. They
faced challenges with the costs of complying with regulations,
whether it is Sarbanes-Oxley or corporate governance. And then
when they come to market, the U.S. Research Settlement that was
reached with the SEC has made it hard for them to get analysts
to cover stocks if they are in the small and mid-cap stock
range. And that is problematic for those companies. So they
face a lot of challenges from beginning to going public,
whereas some of those challenges aren't quite as hard when they
get into foreign markets.
The last reason is one we are just going to have to face.
Prada is thrown up as a big example of this and understanding
they are not a U.S. company. Asia is having a huge surge in
consumer demand, and a lot of companies going public where a
lot of their demand is in Asia want to list on Asian exchanges
because that is where they want to brand themselves. And that
is all part of us competing on a world stage. Where other
places are starting to gain prominence that they didn't have in
the past, our response to that just has to be to compete
harder.
Mr. Goodlatte. Mr. Katz, in your testimony, you say that
there was very little competition among the four floor-based
equity options exchanges before you founded ISE in 1997. You
credit ISE's launch as an all-electronic options exchange with
bringing competition to the U.S. options industry. Should we be
concerned that by merging ISE into the same corporate family
with NYSE's Arca and AMEX exchanges, ISE will cease to operate
as an independent, innovative maverick competitor?
Mr. Katz. I don't think this Subcommittee should be
concerned about a lack of competition in the options industry.
Since ISE's launch becoming the fifth options exchange, an
additional four exchanges started trading options, and there is
even another one announced to begin trading in the first
quarter of 2012. Many options exchanges have joined under one
corporate umbrella, and there are a number of examples of that
today, and it has not diminished the amount of competition in
our industry. It has not diminished the product innovation in
our industry, and I don't believe that this merger will affect
the level of competition both in the U.S. and globally.
Mr. Goodlatte. The Chicago Board of Options Exchange, the
New York Stock Exchange, and NASDAQ all currently operate
multiple options platforms, as you know. In your experience, do
these equity options exchanges that are controlled by the same
parent vigorously compete with their corporate siblings or is
competition primarily between unrelated firms?
Getting back to my first question, if we combine some of
the relationships, if you will, is the competition going to be
diminished and less innovative?
Mr. Katz. I think we would actually lose something if we
combined these exchanges that are under one corporate umbrella
into one marketplace. The reason that there are so many in
existence----
Mr. Goodlatte. Well, no one is advocating that. What we
want to know is whether you are better off being separate
competitors or competitors under the same corporate umbrella.
Mr. Katz. They actually compete with themselves, and the
reason that they are doing that is because each has a different
market model. The way the SEC approves exchanges today, they
are allowed to use one market model, one set of fees per
exchange. And as a result, an exchange can actually compete
with itself and compete vigorously to try to attract different
segments of the marketplace to do business on their exchange.
So I don't believe that they are just working in a
complementary manner. They are actually competing to try to
attract as many different clients to their business as
possible.
Mr. Goodlatte. Thank you.
My time has expired.
I now recognize the gentleman from North Carolina, Mr.
Watt.
Mr. Watt. Mr. Chairman, I think I am going to wait and go
last.
Mr. Goodlatte. Then we will turn to the Ranking Member of
the full Committee, Mr. Conyers.
Mr. Conyers. Thank you for your testimony, gentlemen.
Would you agree to a follow-up inquiry that we may have,
that the Committee may have with the Department of Justice
about this proposed merger?
Mr. Leibowitz. Certainly. We are already actively
discussing this with the Department of Justice and are open to
further conversation.
Mr. Conyers. Well, okay, thank you.
What about you, Mr. Katz?
Mr. Katz. We are in active dialogue with the Department of
Justice, and they are reviewing all of the material that we
have presented to them. And we would be pleased to have a
follow-up review with this Committee if that becomes necessary.
Mr. Conyers. Well, it will become necessary because we
don't know what you are in deep discussion about. I mean, they
don't come back and tell us what they are talking to you about.
The only way we can find out is to get a report from them when
they are finished and then to talk with you about it afterward.
How do you feel about the Securities and Exchange
Commission coming before this Committee to give us their
impressions of what the effects of such a merger might be on
the markets in the United States and in the world?
Mr. Katz. We would be very comfortable.
Mr. Conyers. You are okay with it.
Mr. Katz. Yes, with having the SEC come before this----
Mr. Conyers. You are okay with it, Mr. Leibowitz?
Mr. Leibowitz. With all due respect, you do need my
permission to call the SEC in and you should, in all honesty,
talk to as many people as you need to to feel comfortable with
this.
Mr. Conyers. Well, I wanted to be polite today and on my
best manners. This is a pretty serious inquiry.
What about the United States Treasury? I don't have to ask
you about whether we need to talk with them or not.
Mr. Leibowitz. Sure. I think we are going to set a record
for the number of regulatory agencies that we have to talk to
as part of this merger. I think I have heard it is 47. And so
each of them is going to have, including the Fed, the CFTC, the
SEC----
Mr. Conyers. Well, would you give me the list of the 44
that I haven't found out about yet?
Mr. Leibowitz. Yes. Many of them are European.
Mr. Conyers. Well, they are important too, aren't they?
I noticed a number of things about your testimonies.
Outside of your closing sentence, Mr. Katz, you have told me a
lot about your company and about the circumstances that the
market works in. I am intrigued at your response to the Ranking
Subcommittee Member that you can compete better internally than
externally.
Mr. Katz. Congressman, I don't think I ever used the word
``better.'' But I do believe that----
Mr. Conyers. Well, I will use the word ``better.'' I think
you can compete better if you are separated than if you are
together.
Mr. Katz. The amount of competition that has taken place in
the options industry in various different ways, whether by
exchanges that are independent, by exchanges that are public or
private or under one corporate umbrella, has created one of the
most competitive industries in the United States and it has
resulted in a growth of volume. It has resulted in a better
opportunity for the customers that are using our product, and
that competition continues to grow unabated as a result of the
mergers----
Mr. Conyers. You are entitled to that view. I don't think
bigger is always better, though.
Would you think with me about this consideration? If you
were to merge, what would happen to all the others in the
business? Wouldn't there be a requirement--wouldn't somebody
else have to merge as well because you would be so much larger
than anybody else in this country?
And I was impressed and sympathetic to your explanation,
Mr. Leibowitz, of the relative smallness of your organization
on a global scale.
Mr. Leibowitz. I think the challenge is--and it seems
counterintuitive--that you can't be right in the middle. You
either have to be among the biggest or you have to be among the
smallest. The smallest are efficient because they are typically
late entrants into the market. They don't have the legacy nor
the huge regulatory history. They just are unburdened by all of
those things.
A perfect example is the BATS Exchange which just filed to
go public recently. They have less than 200 employees in the
whole company, and they compete very effectively against both
of our organizations in U.S. options and U.S. stocks.
And then at the top end, you have the companies that have
merged to achieve scale and also to provide a breadth of
platforms. So they are not just focusing on one or two
businesses.
The tough spot is to be in the middle because that means
that you are neither one.
Mr. Conyers. Well, you are in a tough place really. I can
almost sympathize with you.
What do you think all the small people are going to do? You
don't anticipate that there will be other mergers as a result
of yours if you were fortunate enough to gain a merger.
Mr. Leibowitz. Well, I can't speculate on what our
competition would do. I think everyone----
Mr. Conyers. Well, sure you do. You do that every day.
Mr. Leibowitz. I think everyone in our space is constantly
looking at the landscape and trying to decide what their vision
for their company is and whether combinating or whether
standing alone is the best for them in pursuing that path.
There are some people that may look at this and say, gee, we
should look for a partner. There are some people that say, boy,
we don't agree with that strategy.
In fact, NASDAQ's strategy, their response, their attempt
to take us over was saying we don't agree with the broad
platform where you have to do derivatives and technology and
equities. We think you should really be focusing on equities, a
completely different philosophy to the business. And the beauty
about our system is it allows each of us to determine what we
think our vision is and what our platform should be, and we act
accordingly.
Mr. Goodlatte. I thank the gentleman.
The Chair recognizes the gentlewoman from Florida, Ms.
Adams, for 5 minutes.
Ms. Adams. Thank you, Mr. Chairman.
Mr. Leibowitz, why is it that NYSE Euronext, which is the
world's largest exchange by trading volume and market
capitalization of listed companies, has a relatively small
market capitalization? And then why does the Hong Kong
Exchange, which is smaller than NYSE, have a market
capitalization that is more than two and a half times NYSE?
Mr. Leibowitz. Sure. It has to do with such things as being
in areas that are growing much faster because the economy is
growing faster and the markets are growing faster and being in
instruments with more volume such as derivatives; and in the
case of Hong Kong, being in a regime where the regulations
protect them. If you remember, the U.S. regulatory structure
allows relatively open competition with low barriers to entry.
That means that the intense competition drives prices down and
drives our market cap down as well.
So Hong Kong is in the best of all worlds. They are in a
highly protected regime. They have a very rapidly growing
product in a rapidly growing region, and they have some
products that are protected in a vertical silo. So you add all
of those together, and that is why.
Ms. Adams. NYSE has insisted that this deal is a merger of
equals rather than a German company acquiring an American
company. But Deutsche Boerse shareholders will control 60
percent of the shares of the new combined company. Doesn't this
mean that Deutsche Boerse shareholders will effectively control
the NYSE after the deal closes?
Mr. Leibowitz. Sure. It is a really good question, and this
is one that has gotten a lot of press.
It is important to note that Deutsche Boerse itself is 35
percent U.S. owned and only 18 percent German owned. And so
when you put the combined entities together, actually the
combined company is 55 to 60 percent U.S. owned by the common
shareholders.
The distinction of merger vehicles is really a technical
legal distinction and it really has to do with the way the
companies are being brought together with a balanced management
team and a relatively balanced equity base.
Ms. Adams. Mr. Katz, while there will still be eight equity
options exchanges operating in the U.S. after the merger, those
eight exchanges will be controlled by just four different
corporate companies, corporate parents. Should we view this
merger as moving the market from five to four equity option
exchanges operating companies, and if so, what will be the
competitive effect?
Mr. Katz. Congresswoman, one of the beauties of the U.S.
options industry is that you can create an exchange and take
your exchange to the SEC for approval and then become a member
of the Options Clearing Corporation so that your trades can be
cleared. Already today there is an announced tenth exchange,
the Miami International Stock Exchange, that is scheduled to
launch in the first quarter of 2012.
This industry has been growing at double-digit rates for
the last 15 years, and as a result, it is bringing in new
competitors and new companies that want to provide a value-
added service in the options industry. So I have never thought
of this industry getting smaller. It continues to get larger.
It gets larger as a result of the number of exchanges. It is
also getting larger because the number of retail and
institutional investors that are embracing this product, the
options product, has continued to grow. And it is a result of
the education. It is a result of the product development and
the innovation at all of exchanges. And that is something that
I expect to continue.
Ms. Adams. So the decrease over the past 15 years in the
number of U.S. IPO's and the number of companies listed on
American exchanges has coincided with an increase in exchange
competition from electronic exchanges like Direct Edge. To what
extent are the two phenomena related?
Mr. Katz. I am sorry. I didn't understand your question.
Ms. Adams. The decrease over the past 15 years in the
number of U.S. IPO's and the number of companies listed on
American exchanges has coincided with an increase in exchange
competition from electronic exchanges like Direct Edge. To what
extent are the two phenomena related?
Mr. Katz. I don't believe that there is any relationship
between those two. Earlier Larry testified as to the cyclical
and economic issues that are affecting the number of listings
in the U.S. versus international listings, and I agree with
that testimony. The number of exchanges in fact has created a
larger opportunity for companies to trade in the U.S. and to
trade at some of the lowest levels of costs that they have ever
had as an opportunity. So I don't see a relationship between
the two.
And I don't think that this merger will have any impact on
the number of companies listing, but in fact quite the
opposite. It will be a strong attracter to a company that wants
to list with a global exchange and potentially have dual
listings in New York and Frankfurt and more in London and
Paris. And there is an opportunity on a global basis to create
a level of competition that does not exist today.
Ms. Adams. Well, the Wall Street Journal has reported that
in part to alleviate antitrust concerns, Deutsche Boerse may
opt to dilute its share in the Direct Edge stock exchange by
bringing in new bank investors. Is Deutsche Boerse still
considering this strategy, and do you believe that such a
divestiture is necessary to maintain robust competition after
the merger?
Mr. Katz. ISE owns 31.5 percent of Direct Edge. When you
translate that based on their market share of how much equity
volume they trade, that is a little less than 3 percent of the
average daily volume in the equities market. We have shared
this information with the Department of Justice, and they are
reviewing all of the material that we have provided. It would
be too soon to theorize as to what their potential response
would be and what they would ask Deutsche Boerse to do with
Direct Edge going forward.
Mr. Goodlatte. I thank the gentlewoman.
The gentleman from Florida, Mr. Deutch, who I guess will
disavow any affiliation with Deutsche Boerse, is now
recognized.
Mr. Deutch. Thank you, Mr. Chairman. I was just thrilled to
see that today's hearing is about anything having to do with
``Deutch.''
Mr. Leibowitz, if I may, if you could walk through, please,
if you could address some of the questions that stem from your
earlier comments. You acknowledge that the New York Stock
Exchange has always stood as a global symbol for trade and
commerce. I would like to explore that a little bit,
particularly how that view of the New York Stock Exchange may
or may not be altered after any merger like this.
First of all, if you could just walk through. I know you
said there will be a building. Where will the headquarters be?
Mr. Leibowitz. So the headquarters will be as it is now at
11 Wall Street, as well as in Frankfurt. We are currently dual-
headquartered in Paris and New York. We will be, instead,
headquartered in Frankfurt and New York.
Mr. Deutch. Could you just flesh out a little bit how those
dual headquarters will function?
Mr. Leibowitz. Sure. The CEO of our current company is
Duncan Niederauer. He is going to be the CEO of the successor
company and he will still be based in New York.
I am the chief operating officer of NYSE Euronext, and my
main responsibility is for all of our equities markets around
the world: NYSE, Paris, Amsterdam, Brussels, and Lisbon. I will
continue to have those responsibilities plus the Frankfurt
stock exchange, and I will also be based in New York.
The head of the global derivatives business will be the
current head of Eurex, Andreas Preuss. He will be based in
Frankfurt, as will the CFO of the combined company, Gregor
Pottmeyer.
Mr. Deutch. And so when you add a second headquarters, what
impact will that have on American jobs, if any?
Mr. Leibowitz. We are actually moving the headquarters from
Paris to Frankfurt. So that has no net effect on the U.S.
Mr. Deutch. So the merger should have no net effect on jobs
in the United States.
Mr. Leibowitz. Well, not in that way, no.
Mr. Deutch. In some other way?
Mr. Leibowitz. Well, we are obviously looking at how to
combine the companies. This is not a deal about cutting jobs.
It is about creating value, and we think in the long run this
is going to be good for America and American jobs.
Mr. Deutch. In the short run, in order to create that
value, will there be jobs cut?
Mr. Leibowitz. There will be some of both. If you look at
what happened in the Euronext merger, at the same time that we
were cutting jobs, we were also investing in new businesses. We
created the NYSE Liffe U.S., which is a U.S. futures exchange.
We bought the American Stock Exchange and increased the number
of people who were doing AMEX options and so on. And we are
going to continue to be making investments in our technology
business at the same time. But remember, there is not a lot of
overlap in the U.S. businesses--between Deutsche Boerse and
NYSE Euronext. So I wouldn't expect many job losses.
Mr. Deutch. In the new company, how will voting control
work?
Mr. Leibowitz. Sure. This is a public company and this is
common stock. So the combined company should have 55 to 60
percent U.S. shareholders, and we expect to have a large U.S.
shareholder base because it is an important company for U.S.
institutions.
Mr. Deutch. I am sorry. If you could walk through that
again. You said you expect 55 to 60 percent U.S. shareholders,
and then you went on to explain that you would expect that
there would be a strong U.S. ownership.
Mr. Leibowitz. I think it will continue that way because
the exchange space--in particular, our stock has been highly
followed by U.S. mutual funds, value stocks. And so I think
that will continue. That is the base that is going to continue
to hold the stock in the future. We are currently 85 percent
U.S.-held. Deutsche Boerse is only 18 percent German-held.
Actually, it is 35 percent U.S.-held. That one is more U.S.-
held than any other shareholders. And the combined stock will
start out 55 to 60. The chances are it will probably grow from
there.
Mr. Deutch. And is a part of this proposed merger
transaction retaining the name ``New York Stock Exchange'' in
New York?
Mr. Leibowitz. NYSE Euronext will be incorporated in
Delaware just as it is today. It will have a supervisory board
in the United States, and it will be under SEC regulation just
as it is today.
Mr. Deutch. Will the name of the entity be the ``New York
Stock Exchange''?
Mr. Leibowitz. The name of the holding company will not
simply be the New York Stock Exchange, but will reflect the
combination.
Mr. Deutch. Well, I am sorry.
Mr. Leibowitz. To be honest, we don't know what the name
is. We haven't made that determination. It is not like we have
made it in secret. We honestly haven't spent our attention on
it.
Mr. Deutch. You can't confirm now that after this merger,
the New York Stock Exchange will continue to operate as the New
York Stock Exchange?
Mr. Leibowitz. No. I said the New York Stock Exchange will
operate as the New York Stock Exchange.
Mr. Deutch. That is a condition of this merger that you are
agreeing to, that it will forever continue to operate as the
New York Stock Exchange?
Mr. Leibowitz. Absolutely. The New York Stock Exchange will
stay the New York Stock Exchange, just like the Frankfurt Stock
Exchange will stay the Frankfurt Stock Exchange.
Mr. Deutch. Thank you. I appreciate it.
Thank you, Mr. Chairman.
Mr. Goodlatte. I thank the gentleman.
The gentleman from Pennsylvania, Mr. Marino, is recognized
for 5 minutes.
Mr. Marino. Thank you, sir. I apologize for being late. I
just came from another Committee meeting.
Mr. Goodlatte. We are pleased to have you.
Mr. Marino. Gentlemen, thank you for being here.
Mr. Leibowitz, I was not quite clear on your question by my
colleague on the other side concerning jobs that may be lost in
the United States. Do we have any indication on how many jobs
may be lost in the United States and how many jobs may be
gained outside of the United States? Can you give me a number
please?
Mr. Leibowitz. So I would expect that there will be more
jobs lost outside the United States in the short run. There
will be few jobs lost inside the United States, and then there
will be growth of jobs in the United States and abroad as well.
Mr. Marino. Could you just go into a little bit more detail
on the growth for jobs in the United States and what period?
Mr. Leibowitz. Yes. We are growing our technologies
business. We had set a $1 billion revenue target a couple of
years ago. We are about half of that now. That is a business we
are investing in intensively. A lot of those jobs are in the
United States. We are building a futures business in the United
States. It is the main competitor to the CME. It is a very
small business right now. We have high hopes for it. So two of
our biggest growth businesses are in the United States, and we
are going to continue to hire in those areas.
Mr. Marino. And, Mr. Katz, do you have any comment
concerning the lack of or growth of jobs?
Mr. Katz. Well, I agree with Mr. Leibowitz that the
prospects for growth as a result of this company are stronger
and have a higher probability than the prospects of a loss of
jobs. There are great opportunities to build businesses and
innovate, and as we have an opportunity to join with NYSE
Euronext, that will even further come to light and develop as
we begin to make investments into those new businesses. So I
believe that over time we will continue to grow the number of
employees in the U.S. and that will be positive for the U.S. It
will be specifically positive for New York where these
businesses will be based.
Mr. Marino. Mr. Katz and then, please, Mr. Leibowitz, if
you would follow up. Do you see any negative impact in the
United States on other industry, on other areas of job
creation? Do you see any negative impact where this would
create a loss of jobs in the United States outside your
predicted growth?
Mr. Katz. We have spent a great deal of time analyzing the
combination of these two companies, and we believe that it is a
win-win for a number of different constituencies. We believe
that shareholders of this business will benefit from a stronger
company. We believe that the investors, both retail and
institutional, that trade stocks and derivatives on these
platforms will benefit from these synergies. It will lower
their cost of trading. It will lower the costs for broker-
dealers to trade, and as a result, they will be able to invest
their profits into growing the business.
And we believe this will be a benefit for the regulator
that oversees all of these different exchanges, and we can work
together with them to help grow this business and work together
with the global regulators to harmonize some of the policies
and rules and processes and it will help the regulators grow.
So we don't see the negative. We are very excited about the
opportunity to move forward and put these two businesses
together. We think that it is going to be extremely positive
both for the U.S. and for Europe.
Mr. Marino. Mr. Leibowitz, do you concur?
Mr. Leibowitz. Yes, I think that was very well put. I think
the thing to add--and this is largely the impact in Europe--is
that we think putting these derivatives exchanges together will
help free up capital that is badly needed by banks because of
margin requirements. But in general, this should lower costs
for our customers and that should get passed on to investors.
Mr. Marino. I am going to ask you what an old mentor of
mine did when I was in industry when I went to him with a great
idea, at least what I thought as a great idea. I was able to
sit down and state out logically the way you are very
adequately doing here. But let's play devil's advocate for a
moment. What is, if there is any, down side to this?
Mr. Leibowitz. Honestly I have a hard time finding a down
side, sir. I am not sure where I would find it. I think it is a
very exciting opportunity.
Mr. Marino. Mr. Katz, I am going to take a stab at this. Do
you agree?
Mr. Katz. Well, I agree. I would say that the down side is
not allowing this to move forward, and that will weaken the
U.S. It will weaken the financial centers in New York and in
Frankfurt, and that will affect the employees. That will affect
shareholders and that will affect the investors in the U.S.
market far greater than anything else.
Mr. Marino. Thank you very much, gentlemen.
I yield back.
Mr. Goodlatte. I thank the gentleman.
The gentleman from New York, Mr. Nadler, is recognized for
5 minutes.
Mr. Nadler. Thank you, Mr. Chairman. I appreciate your
holding this second hearing and the witnesses coming back today
and sharing their views.
Now, this topic we are discussing today, the role of the
New York Stock Exchange plays in the national global economy
and what a merger of this iconic exchange with a European
exchange--means for these economies--is of particular
significance for my district. As many of you know, I represent
the financial center of our country which resides in lower
Manhattan, and the long-term stability and ability for growth
of these institutions is important for all of us but
particularly for my district.
Mr. Leibowitz, in your testimony, you say that the New York
Stock Exchange has continually had to meet challenges presented
by other mergers and the creation of new exchanges through
diversifying and globalizing because otherwise the NYSE would
have been, as you say, doomed to become a charming but
irrelevant anachronism. You go on to say that this merger with
Deutsche Boerse is an extension of that process meeting
challenges through diversifying and globalizing.
What does the future of the New York Stock Exchange look
like without the merger with DB?
Mr. Leibowitz. Well, I think that the business the New York
Stock Exchange is in is the most competitive aspect of the
securities exchange businesses, and it is more and more
challenged. And I think to fortify it and gain more scale and
gain more efficiency and help innovation, this merger is a
strong fortifier. Without that, we would just face more
competition, and it is harder and harder to maintain the floor
and do the things that we do that keep our brand strong.
Mr. Nadler. You say it will be harder to maintain the
floor. Can you guarantee the trading floor will remain open?
Mr. Leibowitz. The trading floor is remaining open.
Mr. Nadler. But how long can you keep that guarantee for?
Mr. Leibowitz. Well, I am in charge of it. So I am
guaranteeing it.
Mr. Nadler. Let me ask you the following. A merger of this
magnitude has ripple effects for the various players along the
chains. What do you think this merger means for companies,
small and large, looking for exchanges on which to take their
businesses public? What does it mean for investors?
Mr. Leibowitz. Sure.
Mr. Nadler. Do they have fewer options, more options?
Mr. Leibowitz. No. I think the same number of options. We
will be a stronger platform. We are an advocate. A lot of
people think of us as the large cap stock exchange, but the
reality is we have an awful lot of companies that are below $1
billion and below $500 million and even smaller. And we have
really been an advocate for small and mid-sized companies
because we think that they are the engines of job growth, and
it is very important that we maintain a strong presence in
Washington on their behalf and I think that is going to
continue in the future.
Mr. Nadler. A strong presence in Washington? What do you
mean by that?
Mr. Leibowitz. In Washington, in terms of advocating on
behalf of policies that help small businesses, whether it is
with regulators such as the SEC, whether it is with Congress in
terms of other laws, making it clear that the voice of small
businesses gets heard.
Mr. Nadler. So you regard one of your roles is a lobbyist
for small businesses.
Mr. Leibowitz. Not a lobbyist. I think we are an honest
broker, meaning we are not paid by anyone to do that. We are an
advocate in certain aspects because I think when companies go
public, they create more jobs than during any other point in
their lifecycle. And if what we are trying to do is create
jobs, we need companies to get to the point of being healthy
enough to go public. That doesn't mean that companies should go
public before they are ready just based on an idea and not a
real business, but it means that we need to find ways to get
companies public that really are deserving to be public because
that is how they get the currency to hire more people, to grow,
to innovate, and to continue to develop.
Mr. Nadler. 5 years ago, a company owned by the United Arab
Emirates attempted to purchase the port operations at the Port
of New York and New Jersey. At that time, a lot of elected
officials, myself included, raised national security concerns
about selling a critical port to a foreign entity. I understand
the circumstances surrounding the proposed sale of NYSE to DB
or the proposed merger, however you want to characterize it,
are different, but the sentiment remains.
What are the consequences of selling a critical player in
our national economy to a foreign country? How does this
benefit us or potentially hurt us?
Mr. Leibowitz. Sure, sure. First, it is a good opportunity
to make the distinction between this and the Dubai port
situation.
First, the Germans aren't buying anything--the German
government. They are not involved. This is not a government
situation. This is one public company to another, common
shareholders. And as we said, there are more U.S. shareholders
of Deutsche Boerse than any other nationality. So, first, there
is no foreign government involvement.
Second, it is not a physical security point issue like a
port.
But third, this still falls under the same U.S. regulators
as it did before, whether it is tax law, whether it is security
law, whether it is cybersecurity. All of those things are
governed by U.S. law. And so this does not fall into the same
domain.
Mr. Nadler. And you think that this would result in more
trades being carried on in the United States as opposed to
migrating to Europe?
Mr. Leibowitz. I think it will make us stronger and in the
long run probably allow us to retain more companies.
Mr. Nadler. Thank you.
My last question is a very simple question. It is a variant
of a question that was asked before. Who could this Committee
invite to give us a contrary view? In other words, we have two
witnesses, both of whom are saying this is a wonderful thing.
If we wanted to hear the other side, assuming there is another
side, who could we invite who is responsible to give us the
case against this? You said there is nobody really, but----
Mr. Leibowitz. I am sure our competitors aren't thrilled.
Mr. Nadler. And that is the only suggestion you would have,
the competitors.
Mr. Katz. I think all businesses have competitors.
Mr. Goodlatte. If the gentleman will yield. One of their
competitors was offered an opportunity to testify and declined.
Mr. Katz. If I could continue. The comments that have been
made by the competitors and the largest ones that we deal with
to date have all indicated that this will not change how they
compete with us. They will compete vigorously with this
combined entity. And so while given an opportunity to be
invited before this Subcommittee to take a pot shot, I can
imagine that they would. But they have publicly been on record
saying that this will not change how they come in every day and
try to compete to provide the best possible services to their
customers to compete with the Deutsche Boerse Group and NYSE
separately or together.
Mr. Nadler. But your competitors aside, there is no group,
consumer group, public interest group, that you know of that
might give us a contrary view? That is a high testimony. Thank
you.
Mr. Goodlatte. I thank the gentleman.
The gentleman from North Carolina, the Ranking Member, is
recognized.
Mr. Watt. Thank you, Mr. Chairman.
I thank the witnesses.
And probably everybody else has sensed that my perspective
on this may be a little bit different in the sense that I am
not sure exactly what the role of our Judiciary Committee--are
you all buzzing me back there? What am I doing wrong?
Anyway, it never has been quite clear to me what the role
of this Committee on the Judiciary or Subcommittee should be in
a merger of this kind. But I don't want to leave anybody with
the impression that I think this merger shouldn't be thoroughly
scrutinized. I just think that we passed the law. We know what
the antitrust laws are. We know what the consumer protection
laws are, and we have given that responsibility to somebody
else.
So I am actually more concerned about the ability of the
relevant regulators or Justice Department or whoever is going
to scrutinize this--their ability to scrutinize it from the
perspective that we want it scrutinized from. So let me ask a
couple of questions along those lines.
We are always concerned about whether the Department of
Justice, which is a legal entity, has the expertise to really
understand the competition aspects of various businesses. What
role does the Securities and Exchange Commission play with the
Department of Justice in this evaluation? Mr. Leibowitz,
whichever one of you feels like you are best equipped to answer
that.
Mr. Leibowitz. Sure. I will start and then maybe, Mr. Katz,
you chime in here.
In this case, the SEC provides a consultative and advisory
role, answering questions as to how the industry functions and
what the SEC's role is in regulating the industry and how that
would affect the resulting competition. So the DOJ leads the
investigation, asks a lot of questions, gathers information----
Mr. Watt. And they are the ones that actually make the
final decision about whether this is anticompetitive, antitrust
implications, but they get the input from the Securities and
Exchange Commission.
And you said that you were submitting a bunch of paperwork
and answering a bunch of questions from various agencies, 30-40
you said in response to Mr. Conyers' question. Do any of those
agencies do--what are you submitting to them and under what
authority are they asking you for information?
Mr. Leibowitz. Sure. Each of our regulators wants to make
sure, particularly when there is cross-border or cross-country
aspects going on, that their proper regulation is maintained.
So, for example, there is the Anticompetition Authority in
Europe. There is each of the country regulators for each of our
exchanges in Europe because we have a Paris exchange, Brussels,
Amsterdam, et cetera.
Mr. Watt. Okay, but I want to focus on the U.S. entities,
the regulators within the United States. You mentioned CFTC,
the SEC. You mentioned the Fed. Is the FTC involved?
Mr. Leibowitz. Not to my knowledge.
Mr. Watt. What other agencies?
Mr. Leibowitz. The CFIUS committee.
Mr. Watt. CFIUS?
Mr. Leibowitz. We are voluntarily filing documents with
CFIUS. We have already done that.
Mr. Watt. Anybody else that you can identify that you are
submitting information to?
Mr. Katz. I just didn't hear you say Justice Department.
Mr. Watt. Yes, well, we said DOJ at the outset. They are
the big enchilada here. They make the final decision.
What I am not clear on is what these other agencies' role
is. Let's just go one by one.
SEC, obviously, provides expertise to the Department of
Justice, but do they have another role with reference
specifically to the New York Stock Exchange? Are you submitting
information to them and are they reviewing it and for what
purposes are they reviewing it?
Mr. Leibowitz. They work with the foreign regulators in
Europe to make sure that the division of labor--there is an MOU
between, for example, SEC and the College of Regulators even
for our existing exchanges that has to do with rules for
exchanging information when there are investigations that are
cross-border because we have different exchanges and different
companies listing in each place and cross-listing, for example.
We have companies that are listed in both places and so on. So
it has to do with the exchange of information and the way the
rules are promulgated between the territories.
Mr. Watt. And if they found for some reason that this
merger violated those exchanges, what would be their recourse
or made it more difficult for them to police what they are
involved in? What would be their recourse?
Mr. Leibowitz. It is my understanding that they can compel
us to enter into agreements that allow the right kinds of
information sharing and regulatory oversight.
Mr. Watt. What about the CFTC? You mentioned them
specifically. What would they be looking at? What would you
submit to them to evaluate?
Mr. Leibowitz. I think all they really want to do is make
sure that this merger does not impact NYSE Liffe U.S. which is
our futures exchange in the United States and that there are no
ill effects of this in terms of the regulatory oversight.
Mr. Watt. And if they found that it did, what would be
their recourse?
Mr. Leibowitz. They would compel us to take the actions
required that would give them satisfaction.
Mr. Watt. Such as?
Mr. Leibowitz. Either information barriers or oversight
boards or procedures that would make them feel that their
interests were protected.
Mr. Watt. You mentioned the Fed, the Federal Reserve. What
would you be submitting to the Federal Reserve and for what
purpose?
Mr. Leibowitz. So they have partial oversight interest over
the clearinghouse, NYPC, which is a joint venture between us
and DTCC. And again, they would just be making sure that there
is nothing about this merger that would cause a problem for
NYPC.
In the case of CFTC and the Fed, there is no reason to
believe that there should be an impact, given that these are
businesses that we are operating ourselves as they are. I think
they will probably just validate that there is no change for
them.
Mr. Watt. And would the Department of Justice have access
to all of the information from the CFTC, the--well, you have
already established they are consulting with the SEC. What
about the Fed and CFIUS?
Mr. Leibowitz. I am not familiar with how those information
barriers work.
Mr. Watt. Sorry.
Mr. Leibowitz. We voluntarily provide all that information
to all of them.
Mr. Watt. Get us more information so that we understand
exactly what kind of review this gets because in the final
analysis, I mean, we can educate ourselves about it, but the
primary role I think we have is there are gaps in the review
and the regulatory framework for evaluating a merger of this
kind, we need to know that so we can close those gaps. Maybe we
can't close them for this particular transaction, but we need
to know it.
I agree with Mr. Conyers. There will be people behind you.
Probably why they don't want to testify is that they want to
merge next, and they don't want to come and say this is a
terrible thing for you to be merging because they don't want
you to come and say it is going to be a terrible thing for them
to be merging.
So this needs to be reviewed. I mean, it needs to be
reviewed from a number of different perspectives, and we need
confidence that the perspectives from which it is getting
reviewed are thorough and comprehensive. We can't exercise that
kind of control over the European regulators. You can lock up
80 percent of the derivatives market over there, and if they
said it was okay, I mean, there is nothing we could do to the
European regulators. And a lot of this stuff is off--the
potential anticompetitive part of what is being reviewed, as I
understand it, is offshore. Isn't that right?
Mr. Leibowitz. That is correct.
Mr. Watt. Because it is in the derivatives market and
whatever that other thing I mentioned in my opening statement.
I got it here somewhere. I should know better than to try to
talk about this without thinking through it more.
What about CFIUS? What are you giving to them and for what
purpose? And under what circumstances would they have the
authority to say this is a terrible thing?
Mr. Leibowitz. Sure. Well, first, we voluntarily filed with
CFIUS. It is not clear whether we would have been compelled to.
We felt that in this case, given the high profile of our merger
and some of the emotions it has raised up, that we should go
through that process. We have met with the committee. We have
answered their concerns and submitted significant amounts of
information.
I think the focus is, obviously, on physical security, on
regulatory just to make sure that it is all covered, but also
on cyber and other areas of national security.
Mr. Watt. Thank you, Mr. Chairman. You have been generous
with the time.
Mr. Goodlatte. Well, I thank the gentleman. His line of
inquiry has been very interesting. In fact, it prompts me to
wonder whether after this is completed or some other merger or
acquisition that has already taken place, whether we might find
it helpful to call in the various regulatory agencies and
question them about what they have already done as opposed to
what is going on where they don't testify because they are in
the middle of doing it. So I thank the gentleman.
I thank our witnesses for their very helpful testimony
today.
Without objection, all Members will have 5 legislative days
to submit to the Chair additional written questions for the
witnesses, which we will forward and ask that the witnesses
respond as promptly as they can so that their answers will be
made a part of the record.
Without objection, all Members will have 5 legislative days
to submit any additional materials for inclusion in the record.
And this hearing of the Intellectual Property, Competition,
and the Internet Subcommittee is adjourned.
[Whereupon, at 5:24 p.m., the Subcommittee was adjourned.]