After years of on-again, off-again negotiations, the Chicago Board of Trade and Chicago Mercantile Exchange on Friday agreed to combine their trade-clearing operations.
“We did it,” said an exultant Patrick Arbor, Board of Trade chairman. Added Leo Melamed, Merc senior policy adviser, “All issues, major and minor,” were resolved.
The agreement came after a 12-hour bargaining session at the Futures Industry Association conference here.
Clearing systems guarantee trades and ensure that member firms maintain enough capital to cover their obligations. They are the crucial financial underpinnings of all exchange trading.
The exchanges and trading firm representatives are preparing a letter of intent, and they say they will complete a definitive agreement within 90 days.
When signed, Friday’s letter of intent will mark the first written agreement between the exchanges and the first time the industry’s clearing firms have been included in any common-clearing dealmaking.
The boards of directors and members of each exchange must approve the plan in referendums. The plan provides for the new clearinghouse to use the Merc’s “Clearing 21” computer system. Clearing-member firms and the two exchanges will jointly capitalize the new organization, with 51 percent ownership by the firms and 49 percent by the exchanges. Other exchanges will be able to join with approval from the new clearing organization’s board.
The agreement calls for a 15-member board of directors composed of six trading firm representatives, three board of trade representatives, three Merc representatives, three public directors and a non-voting chief executive.
“It’s been a long time coming, but the payoff will be great,” said Merc Chairman Scott Gordon. “All of us are giving up something, but gaining so much more, and we have achieved an agreement that balances the competitive and cost concerns of each party.”
Frustrated by shrinking profit margins, trading firms have been pushing for common clearing. Combining the systems could save millions of dollars each year, they say. Even more savings could come as clearing technology is updated, because the industry would bear only one set of development costs.
