That the U.S. Department of Justice (DoJ) is investigating the antitrust implications of the proposed merger between the Chicago Mercantile Exchange (CME) and the CBOT is no surprise. The DoJ’s second request for additional information wasn’t a surprise either, according to the exchanges. After all, the DoJ has an entire division dedicated to protecting and promoting competition; and the merged CME Group Inc. would be a giant, concentrating more than 86% of the futures contracts traded in the United States at a single exchange.
An antitrust attorney, formerly of the Federal Trade Commission and tasked with following the potential merger and DoJ analysis, says a typical DoJ second request, which the CBOT and CME received in early December, will take four to six months to complete. An analysis entails a review of where the exchanges compete, current market share, sales, new product launches and the potential for future mergers and acquisitions, and consists of two processes: the interrogatories, which require long-form written answers by exchange officials, and document requests, which would include thousands of internal e-mails. The process costs millions of dollars and is extremely burdensome, he says.
The DoJ will typically interview foreign and domestic competitors, anyone complaining about the merger, traders and regulators. “They will probably issue CIDs, (civil investigative demands), basically subpoenas for documents to all their competitors.” He also expects a review of the antitrust case that Eurex brought against the CME and CBOT in March 2005.
The danger for any merger under analysis comes from the possibility of “bad documents,” meaning those that overly detail how a merger could block competitors from entering the market. Bad documents could motivate the DoJ to take depositions from executives who prepared the documents. After the investigation, the DoJ staff issues
a recommendation and the decision to approve or challenge will ultimately be made by Thomas O. Barnett, assistant attorney general for antitrust. Barnett has not challenged a merger since February, when he accepted his appointment.
“I have to believe the DOJ is going to have problems with this,” says Steven J. Sanders, managing director of marketing and business development at Interactive Brokers LLC. “In my mind, nobody else can come in and compete easily,” he says, citing the lack of fungibility of futures contracts and contrasting them with the utility clearing that exists for stocks and options. He says the merger could ignite a push for common futures clearing, “It would be an excellent move for the industry and the trading public.”
Sandy Frucher, president of the Philadelphia Stock Exchange, assailed the proposed merger on the commentary page of The Wall Street Journal, citing concentrated pricing power, a monopoly on interest rate derivatives, concentrated liquidity and the lack of alternatives for clearing futures contracts. He is calling for futures fungibility and for separating the exchange from its clearinghouse. “The Futures exchanges have monopolies on their products because only they can trade a particular contract,” he says, adding that futures contracts are essentially copyright protected because they are cleared only by the exchange’s own clearing company.
Calls for fungible futures and utility clearing were somewhat predictable and have been on brokerage-house wish lists for some time. But CME CEO Craig Donohue says the merger neither creates issues nor changes the clearing equation, adding, “70% of futures are cleared through vertical silos.”
In press releases, the CME and CBOT say they are working closely with the DoJ, plan to cooperate, respond to requests and continue to believe the merger should close by mid 2007. The CBOT, CME and DoJ declined further comments.
Perhaps the most reflective comment came from Futures Industry Association President John Damgard, who says, “The issues are clear. The answers are not.”