updated 6/29/2005 8:13:17 AM ET 2005-06-29T12:13:17

The Chicago Mercantile Exchange (CME) has approached the Chicago Board of Trade (CBOT) about a combination of the two that would create the world's largest futures exchange and pose a formidable threat to Europe's derivatives exchanges.  

People familiar with the matter said the CME was among other unnamed parties that had approached the exchange, which is preparing an initial public offering that could value it at over $1.8 billion.  

The CBOT revealed on Tuesday that it was considering "unsolicited, non-binding expressions of interest" from unspecified sources. It said it would consider them "as part of a broader review of strategic alternatives."   

Any merger of the two Chicago exchanges would create a powerhouse in financial and agricultural futures at a time when derivatives trading volume is at an all-time high. The notional value of contracts traded at the CME last year was more than 20 times the value of equities traded at the New York Stock Exchange and Nasdaq combined.  

The CME declined to comment. The CME's approach, which many in the industry had expected for months, comes only a week after members of CBOT approved an IPO plan.    

It was the latest in a flurry of changes spearheaded by chief executive Bernard Dan to end the CBOT's 158 years as a member-owned club and strengthen its ability to compete with global rivals.   

Although the CBOT's operating margins are about half those of the CME it is growing fast and has scope to raise trading fees over a low fixed cost base. Such a model is becoming common for exchanges as they shed high cost open outcry facilities and expand the number of products traded electronically.   

If the CME and CBOT were to finalize a deal, they could strip out significant overlapping costs - such as expensive "open outcry" pits - and place all their products on one electronic trading system. They already share clearing facilities.   

The CBOT last week priced its IPO at $33 to $36, implying a value of $1.8 billion. The CME has cash and marketable securities of $711 million. Its shares closed up 6 percent at $271 on Tuesday, over six times their value since 2002.  

However, any negotiation between the two exchanges may yet prove difficult, as the CBOT is likely maximize value for its 3,000 members in any sale to any bidder.   

On Wednesday, the CBOT is expected to issue share rights to its members, a step that it said had "certain anti-takeover effects."   

CBOT's agricultural futures contracts make it an attractive target to any buyer betting on the growth of global agriculture, spurred by surging Chinese demand for commodities.   

Ray Cahnman, chairman of Chicago-based broker Transmarket, said the business could grow dramatically if the CBOT converted its wheat, soyabean and corn futures trading from "open outcry" to electronic.   

"If they went electronic they would have a worldwide market. It's enormous; it's about the whole food supply. That's a franchise no-one else has," he said.

© The Financial Times Ltd 2010. "FT" and "Financial Times" are trademarks of the Financial Times.


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