Chicago takes the top spot in derivatives

Chicago takes the top spot in derivatives
By Doug Cameron in Chicago
Copyright The Financial Times Limited 2006
Published: October 18 2006 03:00 | Last updated: October 18 2006 03:00


Richard M. Daley, Chicago's mayor, could be forgiven a lunchtime glass of celebratory retsina after the city's two top financial exchanges struck a definitive merger early yesterday.

Mr Daley was on a visit to Athens to promote the city's bid to host the 2016 summer Olympics, but the impact of the proposed combination of the Chicago Mercantile Exchange and the Chicago Board of Trade will not have escaped the business-friendly mayor.

The stock market flotation of the two companies and the huge ancillary business they have created has fuelled much of the city's growing wealth in recent years.

"This will solidify Chicago as the derivatives capital of the world," says Bernie Dan, the CBOT's chief executive who would stay on at the merged company as a special advisor.

Both exchanges had successfully transformed their business models to embrace electronic trading, and also fended off the immediate threat to their core products from European rivals such as Eurex and Euronext.

However, Mr Dan and Craig Donohue, his opposite number at the CME, recognised that future growth hinged on luring business from an increasingly global customer base, notably from Asia. Users seek liquidity, and the proposed merger will create by far the largest pool in the derivatives sector - in Chicago.

The two exchanges have also buried the cultural differences that had prevented a combination viewed as a "dream ticket" by exchange watchers because of the large synergies on offer.

Charlie Carey, the CBOT chairman, admits the Chicago exchanges were guilty of being arrogant and inward-looking in the past, but says the establishment of a common-clearing link in 2003 helped to build trust. "The cultural issues which existed 10 years ago don't exist today," says Mr Carey, a key architect of the proposed deal alongside his opposite number at the CME, Terry Duffy.

The CME plans to relocate its trading floor to the CBOT's landmark building, less than half a mile from its current headquarters, while the Board of Trade will migrate its electronic business from Euronext-Liffe to the Merc's Globex platform.

The CME Group, as the enlarged company would be known, will expand in financial futures and push into other asset classes such as energy, metals and foreign exchange products.

After burying the hatchets, one challenge will be to spread the spirit of co-operation towards users, who have bristled at fee levels.