From the December 01, 2006 issue of Futures Magazine • Subscribe!


Depending of your perspective, the announced merger of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) was either a shock or a logical, if tardy, evolution. It certainly had been talked about, and exchange leaders had expressed frustration about previous failed attempts to merge.

“It was a long time coming,” says Leo Melamed, CME chairman emeritus, and the man who perhaps has worked longest, if not hardest, at pushing Chicago’s two futures exchanges together. Melamed credits the hard work and friendship between current exchange chairmen Terry Duffy (CME) and Charlie Carey (CBOT) for finally getting it done. “This fulfilled a destiny that will solidify Chicago as the capital of derivatives and risk management.” The combined volumes of the exchanges would have given them a 35% market share of futures global business and 19% of total global futures and options business through August 2006.

Les Rosenthal, an industry veteran and former CBOT chairman who participated in prior negotiations, also credits that friendship. Rosenthal says the deal turns the CBOT’s biggest liability, the trading floor built in 1998, into an asset. “The only thing they [could] do is turn it into the largest McDonalds in the downtown area. But now that they have the CME, or the CME has them, there is a synergy there.”

The new entity will be CME Group Inc., the largest derivatives exchange in the world, valued at $25 billion, with an average daily trading volume near 9 million contracts per day and representing $4.2 trillion in notional value. The deal is expected to close in mid 2007. CME stockholders will own 69% of the combined company and CBOT shareholders will own 31%.

“Growth in the global derivatives industry is accelerating and new competitors are emerging in exchange, over-the-counter and other unregulated markets,” said Craig Donohue, CME chief executive officer. “As a combined company, we will be better positioned to capitalize on these trends and compete more effectively as our industry continues to transform.”

After two years, the new company is expected to save $125 million pre tax, based on administrative cost reductions, the consolidation of trading floors, the merging of technology operations and moving CBOT contracts to the CME Globex platform.

In 2003 the CME and CBOT signed a clearing link, which created savings for clearing member firms and ended the CBOT’s 78-year relationship with Chicago Board of Trade Clearing Corp. The lack of common clearing had long been a bone of contention for customers of both exchanges. The link launched a new era of cooperation that Duffy credits with setting up this merger.

The deal raised anti-trust concerns by some industry veterans, but Donahue said during the announcement, “We are well advised on the Department of Justice antitrust issues, we are not expecting any regulatory issues to be a problem.”

A CME spokesperson acknowledged the technology service agreement between the CME and the New York Mercantile Exchange (Nymex) that allows Nymex to list its contracts on Globex includes non-compete language. That would suggest an adjustment would need to be made for the CME to list CBOT and Nymex metal contracts.

Duffy will be chairman of the combined organization with Carey as vice chairman; Donohue will remain CEO. CBOT CEO Bernie Dan will become special advisor for one year after the sale closes. The board of directors of the combined company initially will be comprised of 29 directors, 20 directors designated by the CME and 9 directors by the CBOT.

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