Chicago and New York could create $11bn derivatives giant

Tom Bawden

The Chicago Mercantile Exchange (CME) is in talks with its New York rival Nymex about an $11 billion (£5.5 billion) deal to create one of the world’s largest derivatives exchanges.

If successful, the tie-up would represent the next step in a frenzy of consolidation among the big global exchanges, which are struggling to build market share. Under the terms of the proposed deal, CME Group – the Chicago exchange’s parent company – would acquire Nymex by offering its shareholders $36 in cash and 0.1323 CME shares for each Nymex share. The offer values Nymex shares at roughly $119.22 each, an 11 per cent premium on its closing price on Friday.

In a joint statement yesterday, issued after mounting speculation about a deal, the companies said that they had agreed a 30-day exclusive negotiating period. The statement said that discussions were at an early stage. “There can be no assurances that any agreement will be reached or that a transaction will be completed,” it said, adding that any deal would be subject to completion of due diligence and the approvals of both boards of directors.

If it takes place, the deal would create a futures industry colossus, dominating the global market for contracts in oil and other commodities.

Strategically, it would also offer CME Group, formed after the merger last year of the CME with the Chicago Board of Trade (CBOT), an opportunity to expand into the booming market for energy contracts.

Christopher Allen, a Banc of America securities analyst, wrote in a research note that it “looks like a great deal” for CME. “The company would be acquiring one of the two major players in energy at a very reasonable price,” he said. CME Group is the world’s largest derivatives exchange, offering a bewildering array of futures and options contracts in everything from frozen pork bellies to live cattle, wheat and corn to foreign currencies, interest rates and even the weather.

Nymex started out in the 1870s as the Butter and Cheese Exchange of New York, but these days is known for its influential futures exchange, in which contracts for natural gas, heating oil, crude oil, petrol and metals are traded. Through its Comex subsidiary, Nymex also offers trading in commodities such as coffee and cotton.

Both the Chicago and New York exchanges feature a mixture of “open outcry” pit trading and electronic trading. Nymex has already joined forces with CME to list some of its most popular contracts on CME’s electronic exchange Globex. In an apparent effort to placate New York’s powerful financial community and to smooth the way for a deal, the CME insisted yesterday that it would maintain trading floors in Manhattan and in other parts of the New York region.

A rash of tie-ups have taken place between the world’s big exchanges over the past two years, including Euronext with the Intercontinental Exchange and the New York Board of Trade with the New York Stock Exchange. The NYSE has also agreed to buy the American Stock Exchange.

This month, CME Group agreed to buy a 10 per cent equity stake in São Paulo’s Brazilian Mercantile & Futures Exchange, the largest derivatives exchange in South America. Richard Schaeffer, the chairman of Nymex, said last year that the exchange was in discussions with several possible partners, thought at the time to include NYSE Euronext and Deutsche Börse, as well as CME.