A merger between CME and CBOT has been talked about for decades
Many have tried to get the Chicago Mercantile Exchange and Chicago Board of Trade together over the years, but as membership organizations, the timing and circumstances were never right. Until now.
In 1925, for example, CBOT offered to rent CME space in the new building it was constructing. CME officials, who were looking for new offices, considered the offer. After all, CBOT had been around for 77 years and the deal held a certain stature and prestige. But despite the allure, CME said “no,” not wishing to forego its independence or character.
In 1953, according to Bob Tamarkin's The Merc, CME President Oscar Olson met with E.B. Harris – then-CBOT president – and asked whether Harris would like to become the CME president himself.
“Oscar, I'm happy at the Board of Trade, but I'd be interested in possibly merging the two exchanges,” Harris reportedly said. But when the two met again the following week, the decision was “no deal.” The exchanges were content with their separate status.
Merger Math: Chicago Mercantile Exchange +
Chicago Board of Trade = CME Group
Throughout the 1970s, both exchanges had great success as CME launched the world's first financial futures contracts, listing seven foreign currency futures contracts, and CBOT launched U.S. Treasury Bond futures. In 1979, according to The Merc, then-CBOT Chairman Ralph Peters tried to woo then-CME special counsel Leo Melamed to CBOT. But Melamed responded: “I must tell you that your offer has had and will have some meaningful and lasting effects on CBOT and CME relationships. I need not tell you that we in Chicago are faced with formidable competitors from New York, not to speak of continuing altercations with Washington. Thus, it is incumbent on our two institutions to coordinate our efforts in these regards and to work closely and in harmony whenever possible because our joint cause is beneficial to Chicago futures markets.”
Then, CME approached CBOT in the late 1980s – not to merge, but to share an electronic platform. CME was developing Globex and CBOT initially signed on as a partner, but then decided to develop its own electronic trading platform. The temporary partnership did, once again, generate talk about a possible merger.
Jack Sandner, who was CME chairman in 1990, could not see it happening then. But Sandner cited the possible synergies that could develop from a merged entity. “We will merge our marketing, our clearing systems, the development of certain technologies,” Sandner said.
Over the next 15 years, global competition among exchanges
became more and more heated. This led to record numbers of initial public
offerings, mergers and partnerships. After CME went public in 2002 and
CBOT in 2005, the wisdom of a merger became more apparent. Bringing
the two Chicago exchanges together made eminent business sense. With
the exchanges no longer membership organizations but publicly traded
companies,
the argument for a merger was the tremendous potential benefit
to customers and shareholders. But what really made the combination
finally possible, however, was a long-term friendship.
CME Executive Chairman Terry Duffy and CBOT Chairman Charlie Carey first met while trading hog futures at CME in 1983, when Duffy was president of his own firm, TDA Trading Inc. After Carey left CME to trade corn futures at CBOT, the two remained friends, and that friendship remained intact even after each man was eventually elected chairman of his respective exchange. In 2003 that relationship enabled the two exchanges to enter into a clearing agreement, in which CME agreed to provide clearing for all CBOT products and related services. This consolidation of backoffice processes became a selling point in merger discussions.
In October 2006, the two exchanges announced a definitive merger agreement, and in July 2007, after many decades of simply being a possibility, the merger between CME and CBOT finally took place.
“[This] transaction happened because of trust,” Duffy said in an interview with SFO magazine. Indeed, it is the combination of mutual trust and strategic sense that launched CME Group out of the realm of possibility and into reality – creating the largest and most diverse exchange in the world. CME Group is an idea whose time has finally come.
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