September 18, 2018 | Financials | Europe | Ended

NEX Group / CME Group: Exploring the Overlooked Antitrust Risks

Risk arb funds are nimble and often successful in selecting which deals to avoid. However, although over 90% of public M&A deals close, it is inevitable that some arbs succumb to failed transactions or trading volatility due to deal nervousness or crowdedness. The expression “picking up pennies in front of a steamroller” is often linked to risk arbitrage investment strategies whereby, although there may exist a high probability of deal completion, this comes with a small return (pennies), and the possibility of a very large loss (steamroller). CME’s £3.9bn acquisition of NEX has been regarded as a relatively safe, non-horizontal merger, and there remains a small risk arbitrage spread left in the deal that is set to close in 2H’18. Facing this backdrop is significant break downside and ten pending regulatory reviews, including US and UK antitrust approvals. In this report, we provide a primer on the dynamics and inefficiencies of the US Treasury market, and analyse the key antitrust risks that NEX and CME will contend with within clearing, execution, compression and national security.

Contents 1. Dynamics of the US Treasury Market 2. UST Execution and Clearing Market Inefficiencies 3. Clearing Antitrust Considerations 4. Execution and Trading Antitrust Considerations 5. Compression and National Security Antitrust Considerations 6. Antitrust Summary: Risks That Could Delay or Break the Deal 7. NEX and CME Break Price Analyses 8. Risk / Reward, Crowdedness, Timing and Trading Thoughts (51 pages)

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