CME Group Eyeing NYMEX For $11 Billion But the DOJ Could Hamper the Deal

Implications: CME Group and NYMEX have entered into an exclusive negotiating period until 3.15.08, to conduct due diligence and to determine if a merger between to the two exchanges is doable. CME Group is proposing a cash and stock deal worth $11 billion, however, the DOJ is calling for the separation of clearing and settlement services from future exchanges where market operators own and control their own clearing operations. Under the current structure, CME Group owns and controls its own clearing and settlement operations, which the DOJ suggests could inhibit competition. The DOJ is making an "about face" from last year when DOJ approved the merger between CME and CBOT without any conditions. The DOJ points to CME's reported profit in 4Q07 of $201 million, which is almost double from the $103 million reported in 2006, prior to the acquisition of CBOT. CME also reported strong volume growth that exceeded 676 million contracts of which 81% was traded electronically, which is a record for CME.

Analysis: CME Group and NYMEX may face some hurdles to getting the deal done if the DOJ has anything to say about the proposed merger between CME Group and NYMEX for $11 billion. The DOJ is recommending to the Department of Treasury that the current structure in relation to clearing futures contracts could be inhibiting competition among futures exchanges in the development and trading of financial futures contracts and could harm consumers and the economy.

1.  The US FIA (Futures Industry Association) is also supporting the DOJ's recommendations to the Department of Treasury and FIA criticized the CME-CBOT merger in 2007, when the DOJ gave the "green light" for the merger to go through without any conditions, however, FIA argued that a CME-CBOT merger could substantially harm competition among US futures exchanges and could raise barriers to entry for new competitors and in a change of position, the DOJ is taking the same position as the FIA with the proposed CME Group/NYMEX merger  

2.  As evidence of potential anti-competition, the DOJ is citing failed attempts by Euronet.liffe and EUREX to move in the US to set up a US futures exchange. In 2005, EUREX filed an antitrust lawsuit against CME and CBOT and alleged that the Chicago exchanges illegally blocked EUREX'S entry into the US futures market

Takeaway:  As consolidation continues in the exchange trading market, only a handful of global exchanges may survive. CME, NYSE, NASDAQ/OMX, LSE and EUREX could be key players and dominate the market as they ramp up their service offerings to include new data products, trading software, hosting, instant replay of market activities, technology outsourcing and trading of private securities, as they target retail and institutional investors. The DOJ and Department of Treasury could play a pivotal role in determining whether the current structure will stand or whether futures exchanges where market operators own and control their own clearing operations should be separated.