The Chicago Board of Trade and the Chicago Mercantile Exchange agreed Monday to adopt a common banking and settlement system aimed at cutting the costs of doing business at the nation`s two largest futures exchanges.
The agreement could be a step toward the merger of the exchanges` most sensitive and costly functions, the clearing and guaranteeing of customer trades. However, progress on the merger, which was proposed two years ago, is slow and the outcome is far from certain.
Firms that are members of the Merc clear their trades through the exchange`s clearinghouse division, while member firms of the CBOT clear through the independent Board of Trade Clearing Corp.
Currently, member firms that do business at both exchanges must keep separate bank accounts for each exchange to settle trades. Under the agreement, only one account will be needed for both exchanges, which is expected to substantially pare transaction expenses of common members.
Firms must settle with the clearing house or clearing corporation two or three times a day. The clearing units stand as the middleman between buyer and seller in futures trading. Firms that show net trading losses must pay the clearing unit, and in return are paid for net trading gains.
Under the new system, the exchanges said, there should be a net risk reduction. This is because a settlement loss at one exchange often is offset by a gain at the other exchange. With such gains and losses netted under the new system, the average payment size should be smaller and the risk of a default to either exchange diminished.
”This agreement represents a quantum leap forward for the futures industry,” said Merc Chairman John F. Sandner. ”The uniform systems and operating efficiencies resulting from this agreement will create a ripple effect throughout the futures industries and will help generate more business in the years to come.”
Clearing Corp. Chairman William M. Feldman said the agreement ”will further protect the financial integrity of our markets through the ability to net the settlements of each common member.”
Because of costs, a merger of the two clearing systems will be needed in the next decade, said Hal T. Hansen, chairman of the Futures Industry Association.
”Can we afford to support the cost of maintaining and enhancing two parallel computerized clearing systems and remain competitive?” he asked.
”It is a serious issue and a top priority over time which, if not addressed properly, will seriously erode Chicago`s competitiveness.”
