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CME Becomes First For Profit US Exchange

Last month, the Chicago Mercantile Exchange (CME) received a favourable ruling from the US Internal Revenue Service (IRS), clearing the way for it to be reborn as a demutualised, for profit, corporation.

The IRS involvement was centred on the question of whether the CME could transform its membership into tax-free shares, and its successful conclusion satisfies the final condition of the demutualisation process.

Following the ruling, two types of shares were issued. Twenty-six million Class A shares were issued on a 3-2-1 basis to CME members, International Monetary Market and Index & Options Market divisions. These shares cannot be sold or transferred for six months, while other restrictions will be gradually lifted between now and August 2002.

The 5000 Class B shares are being issued to members and can be sold, leased, transferred or bequeathed in a similar fashion to the membership seats.

This ruling allows CME to become the first US financial exchange to achieve for-profit status, although Nymex followed eight days later. The Nymex agreement had been delayed due to a legal requirement of its building agreement that compelled it to make certain legal notifications to the New York authorities if it changed status. Both exchanges have indicated that the move is an attempt to streamline the decision making process and allow more effective responses to lower cost online rivals.

In CME’s case, this streamlining is occurring in a number of steps. In August this year, the exchange agreed an 85% reduction in the number of committees. Over the next two years, the number of people on the Board of Directors will be reduced from 39 to 19 with an initial reduction to 30 occurring by vote 18 April 2001. There will also be a new mission statement, five-year vision and 18-month action plan. A new board structure was implemented earlier this year.

The Chicago Board of Trade is also considering moving to for-profit status.

Additionally, the CME has received Commodity Futures Trading Commission approval for a number of measures to increase customer access to its markets via electronic trading.

“Customers have told us they want direct electronic access to our markets, particularly our popular E-mini products, and we are responding,” says chairman Scott Gordon. “This move complements our earlier announcements about opening access and increasing trade execution choices – such as the addition of block trading – in our markets.”

The CME began offering block trading in selected futures markets, including its flagship Eurodollar contract, from 29 November. Merc officials say the move is intended to provide customers with increased trading choices. Block transactions are privately negotiated future transactions executed separately from the public auction market. The transaction can occur either on or off the exchange floor.

For Eurodollar interest rate futures, block trading will be permitted for individual contracts and recognised spreads or combinations in the first four quarterly and serial Eurodollar futures with a minimum order size of 2,000 contracts. For individual contracts and recognised spreads or combinations on the S&P Mid-Cap 400, S&P 500/Barra Growth and Value indexes, Russell 2000, Fortune e-50 Index and Nikkei 225, block trading will be permitted with a minimum order
size of 50 contracts.

Eligible participants include exchange members and member firms, broker/dealers,
government entities, pension funds, commodity pools, corporations, investment
companies, insurance companies, depository institutions and high net worth
individuals. In addition, Commodity Trading Advisors (CTAs) and registered
investment advisors – with net assets under management of at least $25 million –
may also conduct block transactions.

This introduction follows CME formalising its entrance into the B2B arena, linking to to jointly develop a co-branded complex of certain chemical futures and options products available for trade on the Globex2 system.

“Implementing measures to increase customer access to our markets is a sound business decision to promote our growth as a premier global marketplace,” adds president and CEO Jim McNulty. “We are pursuing a variety of additional programmes to reach out to new customers and build business with our existing customer base.”

With the CFTC approval, the CME allowed unlimited, direct electronic access to products traded on Globex2 for all market participants who are guaranteed by a clearing member of the exchange. Previously, the platform was accessible only to members, clearing members or those with Electronic Trading Hours (ETH) permits.

The exchange has phased out its ETH permit programme, which previously required non-members to meet CME’s qualification requirements and pay an application fee. No more ETH permits will be issued, and current permits will expire at the end of their effective period.

CME has also removed limitations on customer access to the “book”, allowing customers to view bids and offers in Globex2 products. CME has eliminated restrictions on the number of Globex2 workstations that members and customers can have.

Profit & Loss

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