Depending of your perspective, the announced merger of the Chicago Mercantile Exchange and Chicago Board of Trade was either a shock or a logical, if long tardy, evolution. It had certainly been talked about and longtime exchange leaders had expressed frustration over previous failed attempts to join the two exchanges.
“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 and Charlie Carey for finally getting it done. “This fulfilled a destiny that will solidify Chicago as the capital of derivatives and risk management.”
“The problem has always been, whose going to be the top dog,” says Les Rosenthal, industry veteran and former CBOT Chairman. Rosenthal, who participated in prior negotiations, also credits the friendship between Duffy and Carey as being a large factor in the deal getting done. Rosenthal says the deal turns the CBOT’s biggest liability— the trading floor it 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%. The merger will have no affect on trading rights or membership and will not affect the membership/ownership and trading right dispute between the CBOT and the Chicago Board Options Exchange.
“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 and trading floor-related cost reductions, the consolidation of the trading floors at the CBOT building, the merging of technology operations and moving CBOT contracts to the CME Globex platform.
In 2003 the CME and CBOT signed a common clearing link, which created savings for clearing member firms of each exchange 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 and the deal launched a new era of cooperation which Chairman Duffy credits with setting up this merger.
The CBOT’s technology agreement with Atos Euronext Market Solutions (AEMS), which provides the platform for CBOT contracts, runs through November of 2008. Bernie Dan said that as that deadline approaches the new Chicago exchange would make a determination regarding an electronic platform for CBOT products but synergies would dictate all contracts of the combined exchange will trade on Globex.
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 spokesman did acknowledge that the technology service agreement between the CME and the New York Mercantile Exchange that allows Nymex to list its contracts on Globex includes non-compete language. That would suggest that an adjustment would need to be made for the CME to list both CBOT and Nymex metal contracts.
Terrence A. Duffy, chairman of CME, will be chairman of the combined organization. Charles P. Carey, chairman of CBOT, will be vice chairman; Craig S. Donohue, CME CEO, will be CEO. Phupinder Gill, will remain CME’s president and COO. Bernard W. Dan, CBOT CEO, will remain in his current position until the transaction is complete. He will then be a special advisor to the combined company for one year. The board of directors of the combined company initially will be comprised of 29 directors, 20 directors designated by CME and 9 directors by CBOT.