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Industry Spotlight > Clearing and Custodial Firms

BOTCC's Flirtation with Eurex Cost It CBOT Clearin

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CHICAGO (–Ending a 78-year-long relationship with the Board of Trade Clearing Corp., the Chicago Board of Trade announced April 16 that it will hereafter clear all its trades through its cross-town rival, the Chicago Mercantile Exchange, effective Jan. 2, 2004.

The chairman of the Commodity Futures Trading Commission, James E. Newsome, said in a statement that he had discussed this move “with the parties involved and my initial impression is that this is a business decision and another step in an evolving process to … create greater market efficiencies.”

This step leaves the BOTCC in the lurch because more than 80% of its business has been coming from the CBOT. In anticipation of this much-rumored rift, Standard & Poor’s Corp. recently put the BOTCC’s credit rating of AAA on a “CreditWatch with negative implications.”

But BOTCC is not without recourse. In a statement issued at the time of S&P’s caution, it said that it ‘has and will continue to respond to changing market conditions.” After that rift became official, a spokeswoman for the BOTCC said that it regrets the CBOT’s decision, but it plans to continue providing clearing members and exchange customers with the highest quality, cost-effective clearing and processing services.

It has been in talks with Eurex, the world’s largest derivatives exchange, headquartered in Frankfurt, Germany. Eurex plans to open a U.S.-registered derivatives exchange and announced the appointment of Michael G. McErlean to head such an operation from Chicago. That would put Eurex in direct competition with BOTCC.

BOTCC’s talks with Eurex were one of the sources of friction between BOTCC and CBOT that have led to this split and the new CBOT/CME announcement. CBOT’s first plan seems to have been to acquire BOTCC. It sent the clearing corporation a letter dated March 31, setting out the terms it would be prepared to offer. That letter requested a yes or no answer by April 7, which was not forthcoming.

Instead, Dennis Dutterer, the BOTCC president, reportedly replied in a brief note that it was impossible for the BOTCC to evaluate the CBOT’s terms so quickly. Some CBOT members apparently thought the tone of the reply was unnecessarily brusque, but Mr. Dutterer’s career exemplifies the long and close ties between the two organizations. He was the interim president and chief executive of the CBOT from April 2000 until January 2001. He has led the BOTCC both before that interim and since Previous HedgeWorld Story.

Worries about a Wandering Eye?

More than a few eyebrows shot up in the air March 31, at the appearance of a story (sourced chiefly to unnamed CBOT members) by David Roeder of the Chicago Sun-Times, asserting that executives at the CBOT has a plan under consideration to seek clearing services elsewhere, in order to punish the BOTCC for a wandering eye, i.e. to discourage it from giving its services to competitors.

“The clearing corporation wants to sell its services to upstart exchanges eyeing the U.S. market,” Mr. Roeder wrote, “particularly an electronic venture planned by Eurex, which is based in Frankfurt and is the largest futures exchange in the world.” He added, presciently as it now appears, that CBOT might turn to its historic cross-town rival, the Chicago Mercantile Exchange, which handles its clearing in house, in order to create a clearing alliance and cut the BOTCC loose.

In a joint statement issued by the CME and the CBOT last week, CME chairman Terry Duffy waxed enthusiastic.

“I absolutely believe that this landmark agreement will be good for our customers, our clearing firms, our exchanges and certainly Chicago–which is firmly positioned as the risk management capital of the world. The CME/CBOT Common Clearing Link is a significant achievement that brings together two premier financial institutions to provide operating, margin and capital efficiencies using CME’s Clearing House and existing infrastructure and processes,” he said.

In November 2001, BOTCC began processing trades for Brokertec. Its also developed an arrangement with Nasdaq-LIFFE in which it calculates and collects fees associated with the give-up activity on single-stock futures trades through its GAINS system. Neither of those arrangements involves clearing responsibilities.

Going beyond such processing services, though, BOTCC collects margin and provides a limited guarantee for trades executed on the Merchants Exchange LLC, St Louis. In 2001 it reached a cross-margining agreement with the Government Securities Clearing Corp. Despite such moves, the CBOT still accounts for 82% of the business of the BOTCC.

Ownership of the BOTCC is in the hands of 91 clearing members with aggregate regulatory capital of US$30 billion. The clearing members include registered broker-dealers owned by securities firms and banks, as well as futures commission merchants.

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