LSEG London Stock Exchange Group Plc

FRANKFURT—A top German regulator Tuesday raised the bar for the planned $30 billion merger of Deutsche Bö rse AG and London Stock Exchange Group PLC, saying the headquarters of a combined exchange would have to be moved away from London.

His statement is the strongest call yet for altering the structure of the planned merger following the U.K.'s vote to leave the European Union. German politicians and Germany's largest association of small investors have called on Deutsche Bö rse's top management around Chief Executive Carsten Kengeter to rework plans so the merged companies' new headquarters wouldn't be in London.

"It is hard to imagine" that the most important exchange operator in the euro zone would be steered from a headquarters outside the EU, Felix Hufeld, president of BaFin, the country's financial watchdog, told reporters Tuesday.

He signaled the merger plans can still be realized despite Brexit, saying there has to "be an adjustment" regarding the location of the holding company that is slated to house both exchange groups. Mr. Hufeld said it wouldn't be politically smart to have large parts of the euro-denominated trading of certain asset classes outside the EU.

Industry observers said a possible solution was to let the deal go ahead as planned and assure regulators that the company's base would be moved to Frankfurt after the transaction closed, which is planned for the first quarter of next year.

Many observers were skeptical about such a scenario because any relocation would necessarily lead to a change in the planned management setup, a thorny issue that could be time consuming.

BaFin can't veto the tie-up, but Mr. Hufeld's comments are significant nonetheless because BaFin is the authority being consulted by decision makers, including the state of Hesse which has to approve the deal that would create the world's biggest exchange group by revenue.

Following Brexit, German politicians have called for moving the headquarters of the combined entity to Frankfurt.

Thorsten Schaefer-Gü mbel, deputy party leader of Germany's Social Democrats and opposition leader in the Hesse state parliament, on Monday said "the deal is basically dead in the current conditions that foresee the holding's headquarters in London" and certain business units operating out of London.

Mr. Schaefer-Gü mbel added the deal's "fundamental assumptions need to be changed now." Even though Mr. Schaefer-Gü mbel isn't directly responsible for the deal, his comments echo statements from other local politicians in Hesse. The state's economy minister, the Green Party's Tarek Al-Wazir, ultimately has to approve the transaction. He has so far refrained from public statements.

Deutsche Bö rse's investor base appears to be split over whether to support the deal after Brexit. Several large investors still support the merger because it makes economic sense despite the U.K.'s leaving the EU, according to a person familiar with the matter.

Others demur. "Deutsche Bö rse's top personnel should critically re-evaluate their merger plans and massively amend or bury them," said Klaus Nieding, a representative of German shareholder association DSW, on Monday. Germany's market supervisor "cannot agree to London as the location" for the new company, he said.

Write to Madeleine Nissen at Madeleine.Nissen@wsj.com and Eyk Henning at eyk.henning@wsj.com

(END) Dow Jones Newswires

June 28, 2016 13:05 ET (17:05 GMT)

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