By John O'Donnell and Andreas Kröner
FRANKFURT (Reuters) - Deutsche Boerse (DE:DB1Gn) and the London Stock Exchange should have their combined headquarters in Frankfurt not London because of Brexit, an influential German minister told Reuters in the clearest public demand for control of the group in Germany.
"The reasons for the headquarters being in Frankfurt are crystal clear," said Thomas Schaefer, the finance minister of the state of Hesse, home to Frankfurt and Deutsche Boerse.
The location of what will be Europe's biggest stock market has symbolic and operational significance, with regulators keen for tight oversight of its derivatives processing business.
"Those involved in London must recognize, also in their own interests, that it would not be a good idea to keep the plans as they are now," said Schaefer, a minister in the regional government that must give approval for the deal to go ahead.
Advisers and company executives are divided about whether London's status in the deal as the main headquarters can be changed. Some people involved argue it could require a new vote by shareholders of both companies, which could upset the deal.
"This might be legally complicated," said Schaefer. "But where there's a will, there's a way."
The remarks, the bluntest yet from a German politician, come amid growing uncertainty over the deal.
This week, German police and prosecutors investigating possible insider trading by Deutsche Boerse Chief Executive Carsten Kengeter searched his office and apartment.
Under the terms of the merger, Kengeter is due to lead the combined exchange, with London the home of the main holding company and its joint board.
When asked about a switch to Frankfurt earlier this week, LSE chief executive Xavier Rolet said: "The deal is set."
However, Britain's departure from the European Union, which was decided after the merger was agreed last year, will isolate London as Europe's financial center and that has turned the tables in favor of Frankfurt.
LONDON AFTER BREXIT
With less than two months before the European Commission is due to wrap up its antitrust review of the deal, Schaefer said the headquarters should be in Germany because its membership of the EU was guaranteed, offering legal certainty.
"No-one knows for sure how things in London will look after Brexit," said Schaefer, a member of chancellor Angela Merkel's Christian Democrat party.
One of the chief concerns is that London-based LCH Clearnet, which is majority owned by the London Stock Exchange, clears more than half of all interest rate swaps traded around the world, many of which are in euros.
That means as soon as Britain leaves the EU, the clearing and regulation of euro transactions will be outside the bloc.
The companies, which will make fresh concessions to EU antitrust officials examining the deal, have so far resisted any such change of the headquarters.
Kengeter has spoken of building bridges to London but his lobbying for having it as the headquarters has angered some in the regional German government in Hesse, said one person familiar with its thinking.
It is not the first time a planned merger between the London and Frankfurt bourses has run into difficulties. There have been four attempts, two public and two informal, to combine the two exchanges during the past decade.