The battle between the Intercontinental Exchange Inc. (ICE) and Chicago Mercantile Exchange (CME) over the Chicago Board of Trade (CBOT) took an interesting twist on Monday when ICE inked an exclusive agreement with Russell Investment Group, parent of the Russell family of indexes.
The move ensures that ICE will snatch futures on the Russell 2000 Index, which have grown to become the second largest equity index product at the CME in terms of open interest, with more than 500,000 open contracts in its E-mini version. It also has been the fastest growing index product from January to May of 2007 with year on year growth of 37.5% according to the CME Web site.
“They [CME] just let this one walk out the door,” says independent trader John Stevens. “The CME downplayed it, but I think it’s pretty big deal,” adding that more fund managers are benchmarked to the Russell than any other index. Stevens wasted no time, selling his CME GEM membership less than a day after the announcement, but he says that it is far more expensive for him to trade the contract on the New York Board of Trade, the ICE subsidiary where the contract will listed. “ICE is backed by Goldman and JP Morgan, and I think they said ‘here’s a chance to sweeten their bid for the CBOT, it gives them more value and they want this stuff out of Chicago.”
But the CME is not simply going to let go without a fight. Their contract with Russell, which expires this year, allows them to list contracts out until September 200 and the CME says it will exercise that right, announcing that they, along with Standard and Poor’s, will soon list a new E-mini small cap stock index. The S&P small cap 600 index is highly correlated to the Russell 2000, but the announcement did not state whether the new futures contract would be based on the S&P 600 or an entirely new index. The CME announcement did say following the expiration of the agreement with Russell, CME and S&P would provide incentives and encourage market participants to transfer open interest from the Russell 2000 to the new small cap benchmark. If they succeed, the ICE could have paid for an empty shell.
While the ICE did not publicly announce how much it paid for the exclusive licensing agreement, the company did file a Hart-Scott-Rodino document, a tacit acknowledgement that the value of the deal is in excess of $59.6 million.
“Any kind of deal that is worth more than $59.6 million dollars has to be reported to anti-trust authorities,” says a spokesperson for the Federal Trade Commission (FTC). He adds that the DoJ then has 30 days to respond to the filing. If neither the DoJ nor the FTC requires more information from ICE, the exchange would then be able to proceed with the deal.
But it doesn’t mean that the ICE paid that much upfront. “If it is structured that they are going to get ongoing royalties or something like that, then you have to do net-present value,” says Joel R. Grosberg, anti-trust attorney for McDermott Will & Emory.
