The common clearing deal forged here last week between the Chicago Board of Trade and the Chicago Mercantile Exchange still has several big hurdles to overcome.
To move it forward, directors of both exchanges must approve a final contract within 90 days that puts meat on the bones of the still-sketchy agreement.
Membership votes on the pact would follow within 45 days, and the outcome is by no means certain. As Merc Chairman Scott Gordon said, “The biggest issue will be the vote by our members.”
If Chicago’s futures exchanges succeed in unifying this crucial element of their business, it would be an important milestone. Clearing systems guarantee transactions and enforce capital requirements, providing the financial underpinnings of all exchange trading.
Besides reducing costs, common clearing in Chicago could foreshadow a merger of the two institutions–a sensible idea that has been debated for years.
A long history of distrust and animosity between the exchanges could be drawing to a close amid alarming competitive threats. Common clearing has got this far because of pressure on profit margins at the trading firms that bring customer business to the exchanges.
The high overhead costs of the open-outcry style of trading–the traditional arm-waving and shouting that personify Chicago’s markets–have come under fire as electronic trading catches on overseas.
Desperate to preserve open outcry and the inefficiencies that provide trading opportunities for members, the exchanges were pushed into the pact.
At best, common clearing will help preserve open outcry by lowering its costs. “We can go a long way toward mitigating the cost advantage of electronic trading,” said CBOT Chairman Patrick Arbor.
At the least, the exchanges have bought some goodwill from trading firms that otherwise might have rushed to embrace alternative electronic markets, such as the computerized Cantor Financial Futures Exchange, due to open later this year.
“This will maintain Chicago as the center of futures trading,” said Merc senior policy adviser Leo Melamed.
The deal Friday came after bargaining sessions that dominated the Futures Industry Association conference here.
It calls for using the stand-alone Board of Trade Clearing Corp. as the shell of the new organization, if a tax liability can be avoided. The name, location and possibly much of the staff of the organization could change, but its AAA credit rating might be maintained.
Under Friday’s pact, the New York Mercantile Exchange, the nation’s No. 3 futures mart, would be invited to consolidate its clearing operations in Chicago anytime. Other, smaller exchanges would face a four-year waiting period.
The exchanges finally agreed to a formula they say will ensure small-firm representation on the organization’s board.
Trading firms would hold a 51 percent stake in the new institution–a provision that could pose problems at the Merc, which now owns 100 percent of its clearinghouse.
“This allows us to compete globally,” said Merc Chairman Gordon. “We’re getting far more than we’re giving up.”
And what of a merger? Gordon won’t discuss it. But Merc special policy adviser Jack Sandner is gung-ho. “The next step should be real consideration of a merger,” said Sandner, who wants to reorganize the exchanges under a single, shareholder-owned structure
The idea of a merger resonates with the Board of Trade’s Arbor. “It’s the right thing to do,” he said. “It’s absolutely silly to have two different exchanges in Chicago.”
