At the Chicago Mercantile Exchange’s (CME) shareholder meeting in late April, CME Chairman Emeritus Leo Melamed remarked that the United States must consider the implications of no longer being the world’s top capital markets center, and that the nation’s status is being threatened by cross border, multi-asset class exchanges from London, Frankfort and Tokyo. And that was before the announcement that the Deutsche Börse (DB) wants to acquire the International Securities Exchange (ISE), the largest U.S. equities options exchange, in a deal currently valued at $2.8 billion. The transaction, if approved, will create the world’s largest transatlantic derivatives marketplace with significant U.S. dollar and euro product coverage.
“This merger is going to make us the leader in three categories,” says Andreas Preuss, Eurex CEO and a member of DB’s executive board. Preuss explained that the merged entity would control 30% of the global market share of individual equity derivatives, 27% of the equity index derivatives market and 50% of long-term interest rate derivatives. “We are also improving the balance of our product portfolio and expanding our portfolio by adding derivatives denominated in U.S. dollars,” he says. “Growth in equity derivatives has exceeded those in other U.S. segments and high growth will continue due to several things: algorithmic trading; more retail and institutional traders and hedge funds getting into the equity derivatives space. And the reduction of trading costs from penny pricing will spur volume growth and be beneficial for the ISE,” he says.
Brad J. Bailey, senior analyst at the AITE Group, says that ISE’s newly listed currency options were a strong attraction for DB and that the deal brings DB the size, scale and distribution necessary to compete on the global stage. “The ISE has been the United States’ preeminent options exchange, with a compelling growth story and a lot of upside,” he says, adding that the liquidity and transparency of the U.S. listed options market, which has deep retail market penetration, should compliment the European option market.
The deal still needs approval from the regulators. Further, the DB’s largest single shareholder, hedge fund Atticus Capital, reportedly was “furious” with the DB for making the bid for ISE without shareholder review.
CME raises bid
In other merger news, after much ado about not increasing its bid for the Chicago Board of Trade (CBOT), the CME did exactly that in mid May, upping its bid by 16%. If the terms are accepted, CBOT shareholders would own 34.6% of the outstanding shares of the combined company, up from 31.2% in the first bid. Also, the number of CBOT representatives on the board of directors would be raised to 10 from nine. The CBOT was finalizing its due diligence on the Intercontinental Exchange (ICE) bid, which had been valued at roughly $1.5 billion more than the CME’s previous offer due to the CME’s lagging share price, when the new bid arrived.
Despite news of record volume and earnings in the first quarter, CME shares had fallen to $497.97, but jumped more than 5% the morning the higher bid was released. Even CBOT officials were positive. “After a thorough review of ICE and careful consideration of its proposal and the revised proposal from CME, the Boards of CBOT Holdings and the CBOT concluded that the revised merger agreement with CME offered greater overall benefits for our shareholders and members,” said CBOT Chairman Charlie Carey in a release. The CME and CBOT shareholders will vote on the merger on July 9.
In an e-mailed response an ICE spokesperson noted, “We are evaluating the announcement, but continue to believe ICE’s long-term value and growth prospects both on a standalone basis and in the proposal to the Board of Trade shareholders is superior.”
Meantime, after questions about the ICE’s ability to manage trading and clearing volume, the exchange announced that in the second quarter ICE intends to transition the clearing of its energy contracts to the newly created ICE Clear Europe. Currently ICE energy contracts are cleared by London based LCH.Clearnet. The clearinghouse will partner with ICE Clear US, formerly the New York Clearing Corp., which ICE acquired with the New York Board of Trade (NYBOT) last January.
Also, ICE has announced the staged transition of its back-up trading facility and the data center that supports ICE Futures, Nybot and ICE’s OTC markets to Chicago from London and Atlanta as of June 2007.
