Clearing Firms Back CME-CBOT Deal, See Risks In ICE Proposal

Discussion in 'Wall St. News' started by CPTrader, Jun 28, 2007.

  1. June 28, 2007 7:33 a.m. EDT

    It seems the FCMs support the CME over ICE to win CBOT. My question: who do the TRADERS want to win - CME or ICE?

    Clearing Firms Back CME-CBOT Deal, See Risks In ICE Proposal

    June 28, 2007 7:33 a.m.

    (This article was originally published Wednesday)

    By Jesse Thomas
    CHICAGO (Dow Jones)--As Chicago Mercantile Exchange Holdings Inc. (CME) and CBOT Holdings Inc. (BOT) increase efforts to gather shareholder support for their merger agreement, they appear to have won the backing of large futures brokerage houses that are concerned about the risks of a deal with IntercontinentalExchange Inc. (ICE).

    The top executives of several major futures clearing firms say they favor the existing benefits of the CME-CBOT common clearing link, and feel the integration of CBOT's business would be painless for CME. They question the ability of ICE - a primarily electronic energy exchange that has put in unsolicited bids for CBOT - to handle the task.

    "It's an enormous undertaking; it is inevitable that this is going to take a significant amount of time" for ICE to fully integrate CBOT's business, said Michael Manning, chief executive of Chicago-based Rand Financial Services Inc., a clearing firm at CME, CBOT and ICE. Manning notes ICE would have to "throw tens of millions of dollars at this."

    CBOT cited integration risks as a primary reason in rejecting both of ICE's merger proposals, even though the offer from the Atlanta exchange, currently valued at about $11.3 billion, is about $800 million more than CME's offer.

    Leaders from CME and CBOT, which first agreed to merge last October, have said that the risks of a deal with ICE could be damaging to CBOT's business. CBOT shareholders, even those opposed to the CME deal, have also expressed concern about ICE's ability to handle CBOT's business. ICE, for its part, is ramping up its clearing capabilities and says it could handle CBOT trades.

    Institutional Shareholder Services, an influential advisory firm, said in a report this week that CBOT shareholders should support the CME deal at the July 9 vote. ISS said that "CBOT shareholders have greater exposure to a reduced realized value in a transaction with ICE than with CME," which is "reflective of the greater integration risk and less compelling strategic fit."

    Common Clearing Agreement
    Manning, who strongly favors the CME-CBOT merger, notes that the Chicago exchanges have already cleared an "enormous hurdle" through the signing of the common clearing link in 2003, where CME guarantees all of CBOT's trades.

    CME Chief Executive Craig Donohue said in a recent interview that the vast majority of futures clearing firms have been "extraordinarily supportive," and that he remains confident the CME-CBOT merger vote will pass. Most clearing firms, such as Rand, are also shareholders of CME and CBOT.

    CME estimates that at any given point, the link saves clearing firms $1 billion in margin efficiencies. Margin is the amount of equity contributed by a customer as a percentage of the market value of their contract holdings.

    Under an ICE-CBOT combination, Manning said, he would lose those margin savings, in addition to incurring the cost of needing to increase his staff.

    Gerald Corcoran, chief executive of R.J. O'Brien & Associates, said an ICE-CBOT combination would require time, energy and costs that RJO would not wish to expend.

    "It's going to be much easier and efficient with CME and the Board of Trade," Corcoran said, noting that the common clearing link should allow for a smooth integration. R.J. O'Brien, the largest independent futures brokerage firm in the U.S., is a clearing firm at CME, CBOT and ICE.

    ICE Clearing
    While CME has in-house clearing, ICE clears its energy futures and over-the-counter derivatives business through LCH.Clearnet Ltd., a third-party entity. Also, through its acquisition of the New York Board of Trade in January, ICE acquired the New York Clearing Corp., renamed ICE Clear, which currently clears Nybot's business. ICE is in the process of scaling ICE Clear to handle all of its business.

    Five of the top 10 CBOT clearing firms by volume are not clearing members of ICE Clear, and only 40 of the total 73 CBOT clearing firms are ICE Clear members. The chief executives of the clearing houses, also known as futures commission merchants note - for those not currently connected to ICE Clear - they could incur the cost of establishing that connection in an ICE-CBOT deal.

    ICE spokeswoman Kelly Loeffler notes that, while the combined CME-CBOT dominates clearing, "the futures industry has derived tremendous benefits from competition in clearing," which ICE has helped provide through the clearing of over-the-counter products.

    Comparing Electronic Platforms
    ICE Chief Executive Jeffrey Sprecher said in a recent letter to CBOT shareholders that ICE is confident it can move CBOT's business "to our clearing solution quickly, seamlessly and on schedule." Sprecher also said ICE has successfully scaled its electronic platform by a factor of 100times in the past two years to meet rapid growth and the addition of new products.

    Despite that scale, CBOT leaders continue to be concerned. In a letter sent to members Wednesday, CBOT leaders noted a new clearing operation and scaled electronic platform would cost at least $45 million over two years, "which, at best, will only replicate the platform and functionality we have in place today."

    In addition, CBOT leaders said the potential migration of CBOT's business to ICE's electronic platform would cause delays and "customer frustration." CBOT referred to CME's electronic platform and clearing operation as "world-class."

    Joe Guinan, chief executive of Advantage Futures, said ICE's electronic trading platform is a distant fourth in the ranks of global exchanges. However, CME's Globex platform is "the fastest, most stable and it's the best-positioned for the next 10 to 15 years of trading," he said.

    Corcoran said CME has proven it can integrate new products onto its electronic platform with "relative ease," referring to CME's agreement to list the energy and metals products of Nymex Holdings Inc. (NMX) on its Globex electronic platform.

    ICE shares recently traded at $145.96, down from the Wednesday close of $151.05. CME shares are down to $537 from the close of $542.16 and CBOT Holdings are down in late trading to $201.19 from the close of $203.

    -By Jesse Thomas, Dow Jones Newswires; 312-750-4117;

    URL for this article:

    Copyright 2007 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit