FRANKFURT (Reuters) - German stock exchange operator Deutsche Boerse and New York counterpart NYSE Euronext plan to merge into what would be the world’s biggest exchange group, according to a German magazine report.

The report in weekly Der Spiegel, made available ahead of Monday’s publication, comes two days before the German exchange group’s supervisory board is scheduled to meet.

A combined entity would become the world’s top securities and derivatives trading company, at a time of unprecedented turmoil for providers and users of financial market services.

NYSE Euronext runs the New York Stock Exchange -- the world’s biggest by market cap of listed companies -- as well as the Paris, Amsterdam, Brussels and Lisbon bourses and derivatives platform Liffe.

Analysts said a merger could bring cost savings that would insulate the mammoth exchange operator from an expected drop in trading volume next year, and better position it to act as a central counterparty for over-the-counter products such as credit default swaps.

“A merger would make sense. They could trade more globally with more liquidity,” said industry analyst Wolfgang Gerke.

HOLDING COMPANY

Deutsche Boerse and NYSE Euronext would set up a holding company in the Netherlands, which then would make a takeover offer to Deutsche Boerse shareholders, the magazine said.

In a next step, NYSE would merge with a U.S. unit of the Dutch entity, Der Spiegel said, citing as its source an “internal paper” that it said has been presented by Deutsche Boerse Chief Executive Reto Francioni to the group’s management.

“We have nothing to announce and, as a general policy, do not comment on speculation,” Deutsche Boerse said in a statement. It said it was “constantly evaluating a multitude of options to enhance the value of the company. This includes frequent contacts with almost every major market participant.”

NYSE Euronext spokesman Rich Adamonis said the company had “no comment on the Der Spiegel report.”

Deutsche Boerse supervisory board member Johannes Witt told Reuters that the supervisory board had not been informed.

“Francioni will have to answer some questions on Monday, that’s for sure,” Witt said by telephone.

In addition to the Frankfurt stock exchange, Deutsche Boerse operates derivatives exchange Eurex and settlement and custody house Clearstream.

The group’s cash equities trading volumes and revenue have come under pressure due to the financial markets crisis and as a result of competition from rival trading platforms such as Chi-X, Turquoise and BATS.

Competition in clearing, where costs in Europe are higher than in the United States, is expected to intensify through U.S. Depository Trust & Clearing Corporation’s (DTCC) proposed $975 million takeover of European clearing house LCH.Clearnet.

‘OPERATIONAL NIGHTMARE’

A deal with Deutsche Bourse would bring together the two top European contenders -- Eurex and Liffe -- for clearing credit default swaps, or CDS, the private OTC market often blamed for its roll in the current credit crisis.

European and U.S. regulators want a central counterparty for CDS, which are contracts that insure against the default of a debt issuer.

A merger would also create the largest U.S. options entity, combining the businesses of NYSE’s Arca Options unit, its American Stock Exchange, as well as International Securities Exchange, which is owned by Eurex.

“The problem is that any deal right now would be an operational nightmare,” said Patrick O’Shaughnessy, analyst at Raymond James and Associates.

“NYSE Euronext currently has its hands full integrating and upgrading its European and North American technologies, and adding another level of integration to the mix would be a very difficult task.”

DEPRESSED SHARES

Shares in NYSE Euronext have fallen 75 percent this year. Deutsche Boerse’s shares have fallen 63 percent. The FTSE/Mondo Visione Exchanges Index .FTMV> is down just over 70 percent.

Activist investment funds TCI and Atticus, which together own almost 20 percent of Deutsche Boerse, have called on the German company to take action to boost shareholder value.

In 2006, NYSE and Deutsche Boerse both bid for Euronext, with NYSE pipping the German company to the post.

The battle for Euronext came after Deutsche Boerse had failed to take over the London Stock Exchange, Europe’s top stock market, after a shareholder rebellion that cost both the German group’s then chairman and chief executive their jobs.

Der Spiegel said Francioni was to become chairman of the new company, while his counterpart at NYSE Euronext, Duncan Niederauer, would become chief executive.

(For a FACTBOX of top exchanges, see ID:nL6281546)