All-Chicago deal is coup for city/CME declares victory in battle for CBOT

All-Chicago deal is coup for city
By Doug Cameron
Copyright The Financial Times Limited 2007
Published: July 11 2007 03:00 | Last updated: July 11 2007 03:00
Chicago invented themodern derivatives industry in the early-1970s, as the walls of the Chicago Mercantile Exchange's in-house club testify.

There is E R Harris, the then-CME president, clasping a surprised-looking woman in Dutch national dress for the launch of a guildercontract. Miss USA and Miss Dominion of Canada are pictured next door, marking the start of silver coin futures.

There were no sashes and tiaras at the Union League Club of Chicago on Monday after members and shareholders of the Chicago Board of Trade met for the last time in their 159-year history to agree on a takeover by the CME, its younger cousin, after a four-month bid battle.

The enlarged CME Group will not have the same photo opportunities as Mr Harris as they push what will be the world's largest futures exchange by any measure into new asset classessuch as currency and credit derivatives.

The all-Chicago deal is a coup for the city as it grapples with intensifying competition from Frankfurt, London and, increasingly, New York in a business that has been transformed from a national hedging operation into an integral part of the global risk and asset management sectors.

In April, Deutsche Börse's Eurex announced the $2.7bn acquisition of the International Securities Exchange.

"It's a remarkable day in the history of our industry," said Terry Duffy, the CME chairman who will headthe new group. "It's agreat thing for the city ofChicago."

The reform of the Chicago exchanges has underpinned a transformation of a city whose manufacturing heart was ripped out in the 1980s.

The CME's tussle with the Intercontinental Exchange for control of the CBOT became a struggle between Chicago and New York for leadership in the fast-growing derivatives sector.

The Wall Street banks that had helped found the ICE had lobbied hard against an all-Chicago deal, irked by the CME's expansion into the larger over-the-counter derivatives market that they liked to call their own.

The banks remain key clients, though their influence has diminished by a new breed of hedge funds and proprietary traders. The CME leadership will remain wary of Wall Street's efforts to create off-exchange products in an effort to parry the power that the Merc's control of the world's largest clearing house provides.

While US antitrust officials cleared the CME-CBOT deal without conditions, the new group will have to deliver on a commitment to avoid abusing its hold on market liquidity.

The threat to the innovation afforded by the years of intense rivalry between the Chicago exchanges also remains a concern in some quarters.

Bernie Dan, the CBOT's final chief executive, insists the combination will allow the group to "dig deeper", expanding into new asset classes, but the pricing power in an industry with margins of more than 50 per cent will be closely watched by users and regulators.

Both Chicago exchanges have insisted that competition is intensifying, driving consolidation as institutions look to push more - largely electronic - trades through their platforms.

Craig Donohue, the CME chief executive who will lead the enlarged group, says these trends have accelerated since the deal was first inked last October. "But our size and scope and market capitalisation really put us at the forefront," he said.

From manager to visionary

Craig Donohue has finally laid to rest the sniping that he could not do a deal, reports Doug Cameron.

A corporate lawyer by training, the chief executive of the enlarged CME lacked the trading background of his peers. But he has displayed a tough edge in securing the takeover of the CBOT to form a world leader with a market value of more than $30bn. Mr Donohue joined the CME in 1989 and worked through the ranks before taking the chief executive job at the start of 2004.

He leveraged the CME's advantage of early conversion to electronic trading and demutualisation; a role that had seen him cast as a manager rather than as a visionary.






CME declares victory in battle for CBOT
By Doug Cameron in Chicago
Copyright The Financial Times Limited 2007
Published: July 9 2007 21:21 | Last updated: July 9 2007 21:21



The Chicago Mercantile Exchange on Monday declared victory after a nine-month pursuit of the Chicago Board of Trade as members and shareholders voted to combine and create the world’s largest derivatives platform.

The vote followed a four-month bid battle for CBOT with the smaller Intercontinental Exchange, which elected not to sweeten its bid for a third time after a contest which pushed the indicative value of the Board of Trade close to $12bn.

The Merc finally ended its quest for an acquisition after boosting its own offer for a third time on July 6, quelling opposition from a core of CBOT members who had pushed for better terms while supporting the principle of an all-Chicago combination.

The enlarged group will narrowly top the derivatives business of Deutsche Bôrse in volume terms following the German group’s planned purchase of the US-based International Securities Exchange.

However, the renamed CME Group also faces a number of challenges as it seeks to integrate the two Chicago exchanges and handle some of the fallout from the bid battle.

The Merc still needs to find a long-term solution to the long-running spat over CBOT’s potential ownership in the Chicago Board Options Exchange, which is currently the subject of litigation in the US courts.

Relations with Wall Street banks have also been strained by the opposition of some institutions to a Chicago deal which they claimed could stifle competition. The Merc argued that banks were attempting to defend their own pricing power in the over-the-counter derivatives market, a key expansion target for the large global exchanges.

The CME was forced to boost the merger terms first outlined last October by almost 25 per cent in order to win control of the 159-year old Board of Trade and its valuable franchise in financial and commodity-based futures and options.

The ICE proposal, which was rejected three times by the CBOT board, had led the indicative value of the Merc proposal for most of the past four months before last week’s final moves eliminated almost all of the difference between the all-stock offers.

The Chicago exchanges were forced to postpone a planned April 4 vote on the merger, and CBOT members remained deeply split over its merits until the latest raise provided the Merc with the momentum to win backing in Monday’s polls.

The renamed CME Group will have a market value of almost $32bn, based on yesterday’s closing prices, and the deal already has antitrust approval following a justice department ruling expected to trigger further consolidation in the US derivatives sector.

NYSE Euronext has said its plans to bolster its Liffe platform with a US acquisition, triggering speculation it could seek a combination with either the ICE or the New York Mercantile Exchange, breaking up the latter’s strategic alliance with the CME.

CBOT shareholders took less than five minutes to vote in favour of the CME deal. Charles Carey chairman said preliminary results showed an earlier poll of CBOT members had also voted overwhelmingly in favour.