The common-clearing deal forged in March between the Chicago Board of Trade and the Chicago Mercantile Exchange overcame a big hurdle Wednesday, winning a 14-8 vote of approval from CBOT directors.
The pact still faces additional hurdles, including an Aug. 5 vote by Merc directors and referendums by the memberships of both institutions later this summer, making its final adoption by no means certain.
Nevertheless, Wednesday’s vote represented a significant step toward unifying this crucial element of the futures business–and perhaps merging the exchanges.
“It’s a first step in consolidating the exchanges,” said David Johnson, a principal at Morgan Stanley Dean Witter, and a director of the Chicago Board Options Exchange. “They should merge.”
Clearing systems provide the financial underpinnings of all exchange trading, by guaranteeing transactions and enforcing capital requirements.
At the CBOT, Chairman Patrick Arbor said he would continue pushing for it. “Common clearing is the right thing to do, and now is the right time to do it,” Arbor said. “(It) will result in savings and efficiencies that our customers demand.”
Wednesday’s vote signals that an era of distrust and animosity between the exchanges could be drawing to a close amid alarming competitive threats.
In fact, CBOT directors approved the pact Wednesday in spite of last week’s news that the Merc would be launching a cash-market trading initiative with Cantor Fitzgerald–the New York firm that is forming a computerized exchange to target the Board of Trade’s key Treasury futures products.
Common clearing has become a top priority largely because of pressure on profit margins at the trading firms that bring customer business to the exchanges.
Combining the systems could save millions of dollars each year, the trading firms have contended. Even more savings could come as clearing technology is updated, because the industry would bear only one set of development expenses.
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 siege as electronic trading has caught on overseas.
At best, common clearing could help preserve open outcry by lowering its costs, its boosters say. At the least, the exchanges can buy goodwill from trading firms that otherwise might rush to embrace alternative computerized markets, such as the proposed Cantor Financial Futures Exchange.
Contrary to terms outlined in March, when the Merc and Board of Trade first reached a tentative agreement, the stand-alone Board of Trade Clearing Corp. would not serve as the shell of the new clearing organization.
That change, which an exchange spokesman said was approved by CBOT directors Wednesday, presumably would mean the Clearing Corp. would liquidate if common clearing became final.
The plan provides for the new clearinghouse to use the Merc’s Clearing 21 computer system. Clearing-member firms and the two exchanges would jointly capitalize the new organization, with 51 percent ownership by the firms and 49 percent by the exchanges.
It’s unclear whether the Chicago exchanges would invite the New York Mercantile Exchange, the nation’s No. 3 futures mart, to consolidate its clearing operations in Chicago right away. Other, smaller exchanges were to face a four-year waiting period under the deal negotiated in March.
