CME Group raises ante over rival’s ownership

The CME Group on Thursday intensified the battle over the future ownership of the rival Chicago Board Options Exchange by lifting a cap on its legal expenses and buying disputed purchase rights.

The CBOE is one of the few remaining mutually-owned exchanges, but its plans for an initial public offering that could value the group at more than $3bn have been effectively blocked by the simmering dispute with the CME.

The CME argues that some members of the Chicago Board of Trade, which it purchased in July, are entitled to a payout from any sale or IPO of the options exchange through their control of so-called exercise rights in the CBOE.

The CBOE argues that the exercise rights were voided by the merger of the two Chicago futures exchanges. The matter is currently before a court in Delaware.

The CME said had lifted the $15m cap on its legal defences in the dispute, and announced it had spent almost $40m buying 159 of the 1,331 exercise rights from CBOT members in a tender offer which formed part of the merger agreement.

The prospect of an IPO and a surge in trading volumes lifted the price of a CBOE seat to $2.7m earlier this month, though the CME is paying just $250,000 for each of the trading rights. The remaining holders of the exercise rights would be entitled to any sale proceeds if the CME’s legal action succeeds.

The sales suggest the sellers expect either a protracted legal battle or a negative court ruling. Both sides have expressed confidence that the court will rule in their favour.

The CME, which this week announced it would close some of its open-outcry pits in favour of electronic trading, also revealed the results of a tender offer used to sweeten its bid for the CBOT in the face of a competing offer from the Intercontinental Exchange.

A recent rally in its share price – helped by the expectation of savings from the trading floor changes – helped trim demand for the buyback. It spent $922m repurchasing shares at $560 each – just below Wednesday’s close – having committed up to $3.5bn for the buyback.

After peaking at $609.96 earlier this month, CME shares had fallen below the level of the tender offer as part of a broad sell-off in exchange stocks, despite the record volumes generated by the recent market turmoil.

Analysts now expect synergies from the CME-CBOT deal to surpass expectations following the consolidation of their two trading floors next year in the Chicago Board of Trade building.

The shift from open outcry to electronic trading in most contracts will see some pits closed altogether, including the frozen pork belly arena which was once one of its most hectic venues. Some currency-trading pits will be consolidated, though the venues for some equity options – complex products which are more difficult to trade on the screen – will be expanded.