The Chicago Mercantile Exchange has agreed to develop a common banking and settlement system with the New York Mercantile Exchange.

The joint settlement system is expected to reduce costs for the 35 member firms that do business on the two exchanges by as much as 50%.

The common banking and settlement system allows member firms to save by settling all trades with a single transaction through a common account at one

of the settlement banks used by the two exchanges.

The system also will reduce risk to the payment system because a settlement loss at one exchange can be made up by a gain at the other. This also will allow for reduced average payment sizes and reduces liquidity and credit stress,

The Chicago exchange had announced a similar deal with its crosstown rival, the Chicago Board of Trade, in August 1992, but the board pulled out of the deal earlier this year, saying it was not cost effective and that the proposed advantages could not be realized.

"The anticipated enhancements for the safety and soundness of the system attributable to the netting of payments and the sharing of collateral are now severely restricted," the board of trade said in a statement.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.