The German financial sector watchdog, BaFin, said Tuesday it was opposed to a merged company made up of the London and Frankfurt stock exchanges being based in the UK in the wake of last week's British vote to leave the European Union.

"It is hard to imagine that the euro area's most important stock exchange would be managed out of a site outside the EU," BaFin chief Felix Hufeld said on the sidelines of a conference in Frankfurt, quoted by the German news agency DPA. "Adjustments will certainly have to be made in that respect," he added.

Under their proposed merger, the holding company combining Deutsche Börse and the London Stock Exchange (LSE) is planned to be legally domiciled in London, while the day-to-day running of the separate subsidiaries will be handled out of corresponding headquarters in London and Frankfurt.

The tie-up, which both sides describe as a "merger of equals," will create one of the world's biggest stock exchanges. Following the British vote to quit the EU, both exchanges stated that their proposed merger would go ahead.

However, criticism is growing in Germany that the merged company will be legally domiciled in the UK. And there are increasing concerns that opposition to the deal could derail the planned $25 billion (22.6 billion euros) merger.

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Deutsche Börse declined to comment, but an LSE spokesman said shareholders would vote on the deal on July 4 and the offer terms were unchanged.

Euro transactions in eurozone

Adding to uncertainty over the City of London's future, Hufeld said the European Central Bank (ECB) would push for the clearing of euro transactions to move to the common currency area within a couple of years.

Hufeld, who also sits on the ECB's supervisory decision-making board, stressed that such trading should move to the EU. "I would see this as a significant political goal to think about steps to encourage this. It cannot be politically smart for a significant amount or a majority of euro-denominated trading ... to take place outside the European Union."

Trading of euro-based securities spans trillions of euros worth of derivatives, and a significant chunk of that is currently processed in London, say experts.

In addition to this, there is foreign exchange trading in the currency itself. The Frankfurt-based ECB wants oversight for practical reasons: if any disaster were to hit these markets, it would be responsible for clearing up the mess. When Britain leaves the EU, there is little incentive to keep this business there.

Good for Paris?

Meanwhile, the French capital Paris is gearing up to attract London bankers. Societe Generale's CEO Frederic Oudea said Paris could benefit as financial institutions based in Britain would no longer have access to European markets as they had before.

Swiss Bankers Association Chairman Patrick Odier also said the uncertainty from Brexit could benefit his members.

"It will ... probably make the value of the Swiss proposition - stability, predictability, state of law, strong currency - even more forceful than it was in the past," he said.

sri/uhe (Reuters, AFP)