Streetwise Professor

January 29, 2008

All Good Things

Filed under: Commodities,Economics,Exchanges — The Professor @ 9:08 am

I’ve been predicting since the Whither NYMEX post almost exactly two years ago that CME would acquire NYMEX. That forecast took one major step closer to realization today, with the CME’s confirmation that it was engaged in merger talks with NYMEX. The parties have agreed to a 30 day exclusive negotiation period.

The timing of the move is very sensible. The CME just completed the integration of CBT products onto Globex. With the integration successfully completed, it is free to make its next move. The smooth segue from integration to offer suggests that this was the strategic plan all along.

As I’ve stated numerous times, the deal makes eminent sense. NYMEX already uses CME’s Globex trading system, and is contracted to do so for another 8 years. This always gave CME a leg up in any contest for NYMEX, as an alternative suitor would have to circumvent that contractual obstacle, and then migrate NYMEX business to a new platform, a costly and potentially risky endeavor. Moreover, the CME/NYMEX tie up offers far more substantial economies on the clearing side than any alternative combination–and remember, clearing is where the money is. Furthermore, NYMEX has made excellent headway in OTC energy clearing, which fits in very well with CME’s strategy of penetrating the OTC clearing business.

I don’t anticipate any antitrust issues. CME and NYMEX products are far less closely related than CME and CBT products, so if the Justice Department didn’t consider the latter a single market for antitrust purposes, they won’t consider the former to be such. Another suitor could arise–possibly NYSE-Euronext–but the economics make the CME the logical winner even if a would-be spoiler appears.

So now the question becomes: Whither ICE? I stand by my prediction that ICE will join up with NYSE-Euronext.

There is also speculation that CME will snap up the KCBOT and MGEX. That may well be, though ICE might compete for those vigorously. It has already purchased the WCE and NYBOT, so the two smaller grain exchanges would fit nicely in that portfolio. Moreover, I’ve noted before that the Chicago exchanges (now singular) always liked having Kansas City and Minneapolis around; they weren’t serious competitive threats, and their existence helped secure support from the Missouri and Minnesota congressional delegations on legislative issues of interest to the Merc and the Board. For that reason, they may be more valuable to CME as independent exchanges, but against that it must be said that it doesn’t make much economic sense for those two exchanges to survive. The cost of offering the KCBOT and MGEX contracts on CME (or ICE) is trivial compared to the cost of operating stand alone exchanges.

So, the consolidation process seems to be in its last phase. If the NYMEX deal goes through, only ICE and CBOE remain of the major independents. CBOE’s situation may become resolved fairly soon. The SEC approved a CBOE rule change that prevents CBOT members from asserting ownership rights in CBOE. This clears the way for the Delaware Chancery Court to rule on the issue. Once that is clarified, CBOE can have an IPO, and once that happens, it will probably be snapped up by somebody soon afterwards. Thus, it is likely that by the end of this year the exchange consolidation movement in the US will be complete, or nearly so. Then the main theater will shift to international alignments. More on that to come.

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