Chicago's CME & CBOT merge to form Global Exchange

Chicago's two major futures exchanges, Chicago Mercantile Exchange Holdings Inc. and Chicago Board of Trade Holdings Inc. yesterday announced that they have entered into a definitive deal worth $25 billion to merge the two organizations to form the most extensive and diverse global derivatives exchange.

Under the deal, Chicago Mercantile Exchange (CME), the largest futures exchange in the United States, is paying $8 billion for its sibling Chicago Board of Trade (CBOT), the world's oldest futures and options exchange.

The merger of the two Chicago markets would be the latest in a series of alliances among the major financial exchanges. The New York Stock Exchange (NYSE), the NASDAQ Stock Market and smaller exchanges have announced alliances, and the New York exchange’s latest chase of Euronext, a pan-European stock exchange with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom, is driven in large part by Euronext’s derivatives exchange in London.

The merger combines the CME's expertise in interest rate, equity and foreign exchange derivatives with the CBOT's strength in interest rate futures and commodities.

Based on the closing stock prices of CME and CBOT on October 16, 2006, the last trading day before the announcement of the merger deal, the combined company, to be named CME Group, is valued at $25 billion (CME equity $18 billion; CBOT equity $7 billion), about 25% higher than a merged NYSE and Euronext.

Terrence A. Duffy, chairman of CME, will become chairman and Charles P. Carey, chairman of the CBOT will be vice chairman of the new CME Group Inc. Corporate headquarters of the merged organization will remain in Chicago.

"This is a landmark agreement for our companies, our industry and the city of Chicago," said Charlie Carey. "As a single entity, we will be the world's premier financial marketplace in terms of product breadth, global reach and market capitalization and ensure that Chicago remains the center for risk management worldwide."

The pair involved in Chicago deal said they will permit the CME/CBOT Company to aggrandize its core offerings and elaborate new products, including pre-existing initiatives and partnerships. However, the merger will not influence the internal trading rights or membership or clearing privileges at either exchange.

The combined company, which is expected to transform global derivatives markets, creating operational and cost efficiencies for consumers and exchange subscribers, while delivering monumental benefits to shareholders, will handle about 9 million futures contracts per day valued at about $4.2 trillion and is expected to save $125 million annually in the second year after the deal completes, mostly through cuts in administrative and technology areas, the pair said.

The transaction is expected to end by mid of year 2007, however, an approbation by regulators, and shareholders of both companies and CBOT members is still pending.

The CME, or simply called the Merc, offers futures and options on futures mainly in interest rates, equities, foreign exchange, commodities, energy and alternative investments. The exchange managed $47.2 billion in collateral deposits at June 30, 2006, including $4.6 billion in deposits for non-CME products.

CBOT provides a diverse mix of financial, equity and commodity futures and options-on-futures products. Using superior trading technology in both electronic and open-auction trading platforms, CBOT provides premier customer service to risk managers and investors worldwide.

After the announcement of the merger deal, the CME's shares jumped 6.1%, or $30.75, to $534. At that price, the per-share value of its bid is $160.52, and CBOT shares surged towards that level, gaining 18.2%, or $24.49, to $159 in early Tuesday trading.