NEW ENERGY
CME Group's combination with NYMEX positions the company for future growth and extends its product reach to serve customers in new asset classes.
When famed investor Jim Rogers told Bloomberg News in July that, "The best investments in 2008 are commodities and natural resources," he wasn't referring to CME Group's combination with NYMEX Holdings, the parent company of the New York Mercantile Exchange (NYMEX). But no doubt he'd give a nod to the opportunities in CME Group's combination with NYMEX, the world's largest energy and metals exchange. CME Group added another key piece to its product lineup in August when CME Group and NYMEX Holdings shareholders and NYMEX members approved the combination. The transaction provides CME Group with a full complement of energy and metals contracts, and a robust platform for over-the-counter (OTC) energies. It also extends CME Group's rapidly growing commodities sector, which already featured grains, livestock, and dairy products.
Yet, the deal does more than add commodity contracts. It advances CME Group's standing as the largest global derivatives exchange in the world. And as exchanges consolidate worldwide across multiple asset classes, the CME Group-NYMEX combination bolsters its position in both the exchange and OTC arenas.
"Today, if you look at the global exchange marketplace, the CME Group-NYMEX combination almost seems necessary in order to compete against other futures exchanges globally," says Sang Lee, a principal with Boston-based research firm Aite Group. "This gives them the firepower to compete against other global markets."
Given the intense focus on crude oil, natural gas, heating oil and gasoline contracts traded at NYMEX, there is probably not a hotter global commodity complex today. NYMEX has grown into the largest energy exchange and metals exchange in the world. It offers trading on the floor and on the CME Globex electronic trading platform, the result of a 2006 technology services agreement.
Trading has grown dramatically since then, with electronic trading on CME Globex accounting for the bulk of NYMEX's volume and growth. In the second quarter of 2008 alone, total NYMEX volumes on CME Globex averaged 865,149 contracts per day, a 42 percent jump over second quarter 2007 and 39 percent increase for the first half of the year. NYMEX's COMEX division, which hosts the benchmark gold and silver futures, saw electronic trading volumes soar 70 percent to 172,450 contracts per day for the second quarter of 2008 versus 2007, up 96 percent for the first half of this year versus last. Prior to listing its contracts on CME Globex, NYMEX electronic volume averaged 63,711 contracts a day.
THE DEAL BENEFITS CUSTOMERS
Ultimately, the CME Group combination with NYMEX has several benefi ts in the short- and long-term. As was the case with the 2007 merger between CME and CBOT, this transaction provides sizeable cost savings - approximately $60 million annually. Those savings are largely driven by technology and administrative synergies.
Beyond that, the combination will provide more value to customers and trading fi rms by offering trading and clearing under one exchange roof. "This strategic combination with NYMEX continues both of our companies' traditions of finding innovative ways to create value for our customers and shareholders," says CME Group Executive Chairman Terry Duffy. "Through this combination, we will be better able to provide increased efficiencies and new trading opportunities for customers around the world and create new long-term value for our shareholders." "This transaction also will produce millions of dollars in savings for our clearing fi rms and additional effi ciencies for customers, will further diversify our revenues going forward, and better position our combined company to compete globally in all asset classes," adds CME Group Chief Executive Officer Craig Donohue.
Financially speaking, the merger is expected to become accretive to earnings on a GAAP basis (according to generally accepted accounting principles) within 12 to 18 months after closing.
Following the Integration Equation
With the CME Group and NYMEX Holdings combination now completed, CME Group is drawing on years of technology integration experience to bring NYMEX's clearing platform into the fold. The project should be completed in roughly nine months, by the second quarter of 2009. As NYMEX products have been trading on the CME Globex electronic trading platform since 2006, the integration focus will be largely on clearing.
"We're proud of our track record and ability to deliver these integrations," says Bryan Durkin, executive vice president and chief operating offi cer of CME Group. "The goal here is to make it almost a non-event for market users." Durkin and his team know what that means, after both the successful CBOT integration in 2008 and the CMECBOT Common Clearing Link project in 2003, when CME Clearing began providing clearing and settlement services for CBOT. The latter was an unprecedented initiative at the time in terms of clearing, technology and operations. For Durkin and the CME Group team, the goal is to provide more value to customers by offering trading and clearing of exchange-traded and over-the-counter (OTC) products on a single trading and clearing system.
A crucial component of this technology integration is the Industry Advisory Council, led by CME Group and consisting of key NYMEX clearing firms, back-office system vendors and proprietary trading back-office personnel. This Industry Advisory Council forum provides NYMEX members, customers and industry participants with the blueprint and timetable for how the integration will proceed; it also provides CME Group with the client feedback needed to pull off a successful integration. In short, this is part of CME Group's communications outreach to help the company, firms and vendors all stay on the same page.
"The good news is we have a proven template that works for integrations," Durkin says. "However, our NYMEX efforts are very unique and this is still a major integration." While molding CBOT into CME Group took place entirely in Chicago, this project will be accomplished in two different cities. NYMEX's open outcry trading will continue to operate in New York with its energy and metals trading fl oors consolidated onto one trading fl oor. Another challenge will be to merge NYMEX's ClearPort OTC system into CME Group's OTC clearing technology.
"Migrating an OTC platform is a new challenge for us," Durkin says. "We've been very focused on CME Clearing360, which is a robust and flexible way for OTC business to be cleared through CME Clearing. Now with ClearPort, we're looking at how best to integrate those two platforms and how best to draw on the capabilities of both."
At the end of the process, Durkin says CME Group customers will benefi t from melding together two exchanges.
"It's always more cost-effective for the end user to utilize one platform for trading and trade processing," Durkin says. "There are real cost savings that customers achieve from such an integration. This further expands that opportunity for the clearing fi rms, and ultimately the customers themselves, who can transact business on that single platform."
Beyond the financials, CME Group will preserve NYMEX's energy and metals trading floors in New York City as long as certain volume and profi tability requirements are met.
“Melding CME Group's global financial strength and distribution capabilities with NYMEX's outstanding franchise in energy results in a powerful combination," says Michael Cosgrove, managing director, commodities and energy, North America, at GFI Group, a leading global interdealer broker. "This transaction will result in bigger, better and more effi cient markets, both on exchange and OTC. This is good for GFI and other market participants."
OTC AND BEYOND
One key aspect of the deal that cannot be overlooked is NYMEX's successful ClearPort platform, an OTC facility for more than 350 off-exchange energy, metals, emissions and softs contracts - coffee, cocoa, cotton and sugar - which are cleared by the NYMEX clearinghouse. This marketplace was a key part of NYMEX's overall success in recent years. Average daily volume on NYMEX ClearPort was 417,601 contracts in the second quarter of 2008, up 35 percent from 308,627 contracts for the same period in 2007. For the first half of 2008, Clear- Port volumes rose 29 percent from a year earlier.
ClearPort also complements other CME Group initiatives in the OTC space. CME Group's OTC clearing solution, CME Clearing360, provides central counterparty clearing for products in the interest rate, foreign exchange and alternative investment markets. Beyond that, CME Group inherits a strong global company in NYMEX, which has forged a number of international partnerships. Last year, NYMEX and two joint venture partners launched the Middle East's first futures exchange, the Dubai Mercantile Exchange, which lists Middle East sour crude oil futures, Oman crude oil futures and Brent crude futures.
NYMEX holds 15 percent of Norwegian-based IMAREX, which offers exchange-traded contracts in ocean-going freight, emissions, farmed salmon, electric power and heavy fuel oil. NYMEX also ventured into Canada with an energy trading platform joint venture with Montreal Exchange, which has since been acquired by TSX Group in Toronto.
Given CME Group's strong emphasis on international expansion and growth, experts say NYMEX will enhance its potential for growth as it is folded into CME Group. Craig Pirrong, professor of finance and the energy markets director for the Global Energy Management Institute at the University of Houston, sees instant international synergies from NYMEX's connections to Dubai and CME Group's partnership with BM&FBOVESPA in Brazil, an emerging energy powerhouse. CME Group also has tremendous strength with its local access hubs around the world, which can help extend NYMEX's futures and OTC contracts to a larger base of users.
"Globally, this cements their leadership," Pirrong says. "This will allow CME Group to turn its attention to where it's going to grow heading forward."
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