Fears That ‘Narrow’ Regulatory View May Thwart Merc in NYMEX Deal

Posted March 20, 2008

NEW YORK – The Chicago Mercantile Exchange’s (CME) proposed acquisition of the New York Mercantile Exchange (NYMEX) represents an effort to compete worldwide as a derivatives exchange, but US regulators could still say, “not so fast,” to the deal, say informed industry observers. The challenge before the Merc is to persuade US regulators not to see the merger in a narrow US-only context, but to think globally even as they must act locally. The Merc announced its plans to buy NYMEX on March 17.

“There is formidable competition from other global exchanges, from some of the big derivatives exchanges in Asia and Europe,” says Kevin McPartland, Senior Analyst at consultancy Tabb Group. “The CME is large and in the US seems like a monopoly, but globally they’re not a monopoly, although they are a formidable competitor to other global derivatives exchanges.”

Globally, adds McPartland, “Eurex is probably quite a big competitor. NYSE Euronext is not as big a player in derivatives in the US, but in Europe they have a pretty substantial market share. I’m sure we’ll see those grow.”

In the US, the combined CME/NYMEX would make CME an even stronger competitor against the IntercontinentalExchange (symbol, ICE) and the Electronic Liquidity Exchange (ELX), according to McPartland.

This could lead to ICE seeking an acquirer or a joint venture. “The general feeling is the ICE won’t be able to compete independently,” according to Sang Lee, Managing Partner at consultancy Aite Group.

When the CME acquired the Chicago Board of Trade (CBOT) in 2006, the Commodity Futures Trading Commission (CFTC) raised concerns about the combined CME and CBOT gaining a monopoly on clearing operations for their options trades.

“It’s not a sure thing in regulatory approval,” says Lee. “This is the same question as when CME acquired CBOT. It certainly doesn’t help the CME to run into a regulatory objection and that’s the end of [the deal]. I don’t think it’s going to be as smooth as the deal they consummated with the CBOT, only because the clearing issue seems to have increased for whatever reason and competition certainly is shrinking.”

The CME will have an advantage, however, in integrating NYMEX because NYMEX already uses the CME Globex trading platform, notes Lee. The acquisition of NYMEX, in broader terms, also complements CME’s product mix. “With the pickup of NYMEX and the energy and commodity side of the business, when you add up the financial and agricultural positions CME has in the futures market and combine them with what NYMEX brings to the table, it certainly puts CME in a very nice competitive position globally.”