Chicago Exchanges Edge Toward Union

Chicago's futures exchanges took a small step on Tuesday toward the goal of combining operations when a committee voted unanimously in favor of common banking for their members.

But while the joint strategic initiatives committee's second meeting produced signs of progress on some smaller issues, its chairman warned that the Chicago Board of Trade and Chicago Mercantile Exchange still have significant obstacles ahead.

"There are some things where the exchanges have fundamentally different views," said Merton Miller, a Nobel Prize-winning economist from the University of Chicago who is heading the joint committee. "The next step is fact-finding."

Formed in January, the committee is seeking ways to address the cost- cutting concerns of the futures subsidiaries of commercial and investment banks. These operations, known as futures commission merchants, typically have memberships on both exchanges. They have argued that combining the operations of the exchanges would reduce duplication of systems and expenses.

At its first meeting, in February, the committee stated a long-term goal of merging the longtime competitors. But Mr. Miller said at the time that a merger would require several steps.

One of the first actions taken at Tuesday's meeting was the agreement on a common banking arrangement. This issue, one Mr. Miller had called a "no- brainer," is relevant because futures merchants currently must keep separate bank accounts for operations at each exchange.

While some technical points remain to be resolved, he said participants are in general agreement on the need for common banking.

Also, the committee made progress toward coordinating advertising efforts. Currently, the exchanges advertise jointly at Chicago's O'Hare International Airport, but have separate marketing efforts elsewhere.

Roadblocks remain on other issues, however. For example, both exchanges currently operate after-hours trading markets, and an agreement on how best to run this business will require considerable work. Likewise, hashing out differences in computer systems for clearing and executing orders may take a long time.

Mr. Miller said the committee asked the subcommittees covering the areas to provide data to help it decide how to bring the exchanges closer on these matters. In addition to after-hours trading and clearing, subcommittees cover regulation, technology, market data, and membership.

Gathering information is time-consuming, and the talks are stretching thin the staffs of both exchanges. In fact, the time required to generate the data, prepare reports, and conduct meetings may force the committee to get outside help.

Whatever the benefits generated from cost-cutting efforts, Mr. Miller said, the committee does not wish to stifle the competition between the exchanges in contract innovation.

In the past week, both exchanges launched futures and options contracts based on Latin American Brady Bonds. The Board of Trade's contracts are based upon indexes of the bonds of Argentina and Brazil; the Mercantile's contracts are based upon specific bonds of Argentina, Brazil, and Mexico.

So far, though, the competitiveness of the exchanges has not spilled over into the subcommittee meetings, much to Mr. Miller's satisfaction.

"We know what people's opinions are," he said. But, he added, "I was delighted at how little interexchange rancor there was."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER