By Andreas Kröner and John O'Donnell
FRANKFURT (Reuters) - Germany and the European Central Bank are pushing harder for Deutsche Boerse (DB1Gn.DE) and the London Stock Exchange (LSE.L) to give Frankfurt a greater role once they merge, now Britain is leaving the European Union, people involved said.
As it stands, London is due to be the home of the main holding company of the merged exchanges and the joint board would also be in Europe's financial capital but Brexit may upset the plans in favour of Frankfurt.
German regulators, politicians and the European Central Bank (ECB) all want more control over the company and for that to work after Britain leaves the EU, at least some of the critical holding company may have to be based in Germany.
The growing divisions over the holding company's location are hanging over the deal to create Europe's biggest stock market, despite high hopes when it was announced last February that the strong commitment from both sides gave it a good chance of succeeding.
"Germany must have a full regulatory grasp of the holding company of the merged exchanges," said a regulator in Germany, which has the power to block the deal.
"That would only be possible if the holding company is either entirely based in or has a dual base in Germany."
Other regulators and people involved in the deal who spoke to Reuters on condition of anonymity expressed similar concerns about the need for a German base.
Eric Menges, who heads a group called FrankfurtRheinMain, which is backed by local German politicians and aims to promote Frankfurt to businesses, summed up the mood.
"Wherever you look across all political parties, there is no support for a London holding," Menges said.
A dual holding company split between Frankfurt and London could address the concerns of regulators, the people involved in the talks said, but such a move has been resisted in London.
That structure would represent an erosion of power for London following Brexit as oversight of the exchange would have to be shared fully with the ECB and German authorities.
The issue has become even more pressing just two months before the European Commission is due to wrap up its antitrust review of the deal now that Britain has said it plans to leave the European single market.
British Prime Minister Theresa May's comments on Tuesday formed the backdrop for a meeting between LSE Chief Executive Xavier Rolet, Deutsche Boerse head Carsten Kengeter and Volker Bouffier, one of Germany's most influential politicians.
Bouffier, an ally of German chancellor Angela Merkel, has signalled in the past that he wants Frankfurt not London to be the main headquarters for the merged company.
The European Central Bank based in Frankfurt has also weighed into the debate. Typically at pains to stay at arm's length from decisions by private companies, the ECB recently took the highly unusual step of commenting about the merger.
"The United Kingdom's withdrawal may lead to a loss of oversight," ECB President Mario Draghi wrote to a European lawmaker.
"It will be important to find solutions that at least preserve, or ideally enhance, the current level of supervision and oversight," Draghi wrote.
He said the ECB would analyse the merger carefully, without addressing the issue of where its main headquarters should be.
One of the chief concerns for the ECB 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 European Union, the clearing of euro transactions will be outside the European Union altogether and in the hands of British regulators.
"Kengeter knows what we think. For us, the clearing is the important part. They have to come up with a solution," a person familiar with ECB thinking said.
"We are not going to stop the deal but we can give them a hard time on a daily basis and they know this."
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.
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.
For now, both companies are sticking to their guns. On Monday, the London Stock Exchange said it had no intention of moving LCH to Germany and that regulatory arrangements would remain in place.
Deutsche Boerse also said the merger was "not about relocating businesses".
Speaking at Deutsche Boerse's New Year reception on Monday evening, Kengeter said the exchange would be "supporting Europe's future cohesion" by maintaining vital bridges between the region's two biggest economies.
Privately, however, people involved in the talks are growing pessimistic. "I believe the chances of success for this deal are now below 50 percent," said one.
(Additional reporting by Arno Schuetze, Francesco Canepa, Andreas Framke and Edward Taylor in Frankfurt; writing by John O'Donnell; editing by David Clarke)