Ex-CEO is back to haunt CME

James McNulty is preparing to storm the futures empire he helped build.

As Chicago Mercantile Exchange CEO, Mr. McNulty engineered the company's initial public offering in 2002 and oversaw a doubling of its share price. But one year after the IPO, he was shown the door amid friction with CME's member-controlled board over his pay and management style.

Now the guitar-strumming futures guru is working on a plan to break CME's hold on the U.S. Treasury futures market as chairman of NYSE Liffe LLC, a new market owned by New York Stock Exchange parent NYSE Euronext Inc. CME gets about 20% of its revenue from fixed-income derivatives.

Earlier this month, NYSE Liffe struck a deal with Depository Trust & Clearing Corp. to form a joint venture designed to radically reduce the cost of Treasury-bond trading. And over the next few weeks, Mr. McNulty, NYSE Liffe CEO Tom Callahan and DTCC executive Murray Pozmanter will be calling on dozens of hedge funds and other “buy-side” players, asking for data on holdings to quantify their promise of “very substantial” savings for traders.

Mr. McNulty, 58, dismisses the suggestion of a grudge against his former employer, but he does relish the chance to create a rival. “It's fun for me to be a part of it,” he said. Asked about the potential threat, a CME spokesman said, “We remain focused on providing the most efficient markets for our global customer base who rely on our ability to provide liquidity backed by our proven central counterparty clearing model.”

Mr. McNulty knows the futures business — and CME in particular — like few others, although it didn't start out that way. A fourth-generation Chicagoan who played folk guitar semi-professionally in the 1970s, Mr. McNulty got a bachelor's degree in liberal arts and sciences at the University of Illinois at Chicago in 1973, then traveled overseas to write a master's thesis on Samuel Beckett at University College Dublin.

But Mr. McNulty found a career in finance, leading CME to hire him in 2000 to whip the 102-year-old, member-owned club into a for-profit operation in advance of a public offering. He did that, slashing committees, streamlining management and forcing efficiencies into what had been a mostly political institution.

His strong-willed, intellectual approach never sat well with CME brass, particularly powerful former Chairmen Leo Melamed and Jack Sandner. And many member traders complained about Mr. McNulty's pay package — he left at the end of 2003 with stock options valued at more than $60 million.

By the time of Mr. McNulty's ouster, CME was a publicly traded company with rapidly rising shares, a currency the company later used to buy rivals Chicago Board of Trade and New York Mercantile Exchange to fortify its dominant position in U.S. futures trading.

After CME, Mr. McNulty took a job as a director at Archipelago, a Chicago-based stock-trading platform later acquired by the New York Stock Exchange in a transaction that turned NYSE into a publicly traded company. NYSE later acquired European exchange company Euronext N.V., owner of the London-based futures exchange known as Liffe. Mr. McNulty kept his spot on the board, and last year took the additional role of chairman of the company's U.S. futures exchange.

Past attempts to capture the lucrative debt-futures market failed because investors prefer to trade on the exchange with the highest volume. But Messrs. McNulty and Callahan think they have something novel. Traders of Treasury futures usually trade the underlying government bonds as well, which requires them to put up separate margin deposits with two clearinghouses. The joint venture allows investors to post both margins at a single clearinghouse. The result: huge capital savings. That, said Mr. McNulty, is the edge even against CME, which controls Treasury-future trading.

“When you already have 97% of a futures market going through one clearinghouse, it's difficult to compete in the clearing space unless you have technology, market access and capital efficiencies,” Mr. McNulty said. “By putting together those three things, you actually have an opportunity to compete.”

One of the first things Mr. Callahan did as the company's new CEO was to fly to Chicago to confer with Mr. McNulty on strategy. The upshot, he said, was a decision to focus on technology first, products second. Last quarter, NYSE Liffe completed a Chicago data center with the capacity to handle millions of contracts a day. NYSE Liffe, which now offers futures on gold, silver and a few stock indexes, currently handles about 25,000 contracts a day.

Still, not all observers are convinced the new formula will work.

“CME is going to do everything they can to undermine (the competition),” said Michael Gorham, an Illinois Institute of Technology professor who has worked both at the CME and at its regulator. “The big question is: How much are the capital savings, and do those savings outweigh the liquidity disadvantage?”

NYSE Liffe's new clearinghouse, called New York Portfolio Clearing, won't be up and running until 2010. A financial regulatory overhaul may change the landscape by then, Mr. Callahan said, but at this point he also envisions clearing other fixed-income derivatives and breaking into the over-the-counter market that is CME's best hope for growth.

Mr. McNulty, associates say, had hoped to stay longer with the CME, and to this day many believe he got a raw deal when he was pushed out. Some CME members, by contrast, say he was let into the vault to stuff his pockets on the way out.

Mr. McNulty himself doesn't appear to harbor any bitterness.

“We built a great business at CME,” he said.

Ann Saphir is a reporter at Crain's Chicago Business, a sister publication of Pensions & Investments