CHICAGO Fresh from its acquisition of the Chicago Board of Trade, CME Group, the worlds largest exchange, is already mulling its next move.
With a $29 billion market capitalization and deep coffers, the CME has the means for further acquisitions any of which would enhance Chicagos rising prominence as a major global trading center and the hub of booming options and derivatives markets.
There are interesting things taking place right now on a global basis, CME Chief Executive Officer Craig Donohue said in an interview. A cautious lawyer, Mr. Donohue declined to elaborate but added: Having solidified our position in North America, we have really strong capabilities. We are interested in a number of the large developing economies, India, China and the Asia-Pacific region.
In Asia, the CME has already entered into a number of memorandums of understanding with stock and futures exchanges. The bilateral agreements only cover a loose exchange of information and technical cooperation, but they represent bridges that could lead to stronger ties.
While the globalization of trading paves the way for a range of overseas opportunities, Mr. Donohue has not forgotten that one of the few major targets left in the U.S. market is the Chicago Board Options Exchange, and he is positioning his group to be a contender whenever the worlds largest options exchange comes into play.
Mr. Donohue acknowledged meeting with another financial player about a very exciting undisclosed project. It did not involve any of the big three N markets the Nasdaq, the New York Mercantile Exchange or NYSE Euronext.
More than a Chicago exchange, the CME is a global market with a client base spread over 80 countries connected to its Globex trading platform via eight international telecommunications hubs. In 2006, what is today the CME Group handled 2.2 billion contracts on U.S. interest rates and equity indexes, foreign exchange and agricultural commodities with a notional value of $1 quadrillion about 15% reflecting trading originating overseas. The CME also trades energy under an agreement with Nymex.
Another Chicago play?
Earlier this month, the CME spent $40 million to buy 159 CBOT exercise right privileges on the CBOE, which means it could potentially secure a solid stake in the leading options market.
Volumes for U.S. stock and equity index options trading are exploding at a faster pace than futures, setting a new high of 294.2 million contracts in August, a whopping 83.4% above the August 2006 level. Nearly one-third of all options contracts changed hands on the CBOE, the last major U.S. exchange that has not yet demutualized, sending the price of a seat to a record $2.5 million on Aug. 31.
CBOT members helped found the CBOE in 1973 and received the exercise right privileges in exchange, which they say should translate into some ownership of the options exchange once it becomes a shareholder-owned company. CBOE officials make the point that CBOT membership disappeared when the CME acquired the CBOT, extinguishing any ERP-related claim of ownership.
The CBOT sued the CBOE in the Delaware Chancery Court over the ERPs last year, but the CBOE countered with a December 2006 filing asking the Securities and Exchange Commission to rule on the matter which the market regulator has not done yet. On Aug. 3, the Delaware court said it would not act until the SEC decides on the matter.
The reality is that you have a private dispute, which is based on a contract, said Mr. Donohue, who doubted the SEC would want to rule on a private business matter. Ultimately, this will be in the hands of the court.
Mr. Donohue believes the CME is on a legal ground solid enough to pursue the matter, which may pave the way for an eventual acquisition of the CBOE. Following the merger with the CBOT, the CME gave CBOT members the option to sell their ERPs to the newly formed exchange for $250,000 each. The CME ended up owning 12% of the 1,331 outstanding ERPs thus becoming the single largest owner ERPs and potentially largest shareholder of the CBOE.
The CBOE demutualization cannot proceed without resolving the ERP issue, which lengthy litigation could stall.
Were in it for the best (ERP) recovery, not the shortest outcome, Mr. Donohue pointed out, adding that his exchange has a significant economic interest in the outcome of the issue.
There is the possibility for a settlement in the case. We would be hopeful this could be resolved on the basis that maximizes the value to the CBOT holders. But absent of resolving this amicably, frankly the CBOE will have a very difficult time moving forward with demutualization, Mr. Donohue added.
CBOE executives declined comment but said in a statement, The recent CME purchase of a large number of ERP has neither strengthened its position nor had any bearing on the litigation whatsoever, as the ERP was unique and individual to former CBOT members. The CBOE remains focused on its demutualization and continues to work toward this goal.