Death of Global Exchange M&A? Not If CME's Duffy Can Help It

(Bloomberg) -- The era of cross-border exchange mega-mergers isn’t over if CME Group Inc.’s Terry Duffy has anything to say about it.

The Chicago-based futures trading behemoth agreed to buy Michael Spencer’s NEX Group Plc for an equity value of about 3.9 billion pounds ($5.5 billion), according to a statement Thursday. A marriage of CME and London-based NEX could reverse a recent pattern of exchanges avoiding ambitious global deal-making.

The tie-up makes sense because NEX owns BrokerTec, a key market for trading U.S. Treasuries, said Kevin McPartland, managing director of market structure and technology at Greenwich Associates.

“The crown jewel of NEX is BrokerTec,” he said. “Since this is a U.S. firm buying a market for U.S. debt,” it can be seen as a logical step for CME, he added.

Other exchange operators have been hesitant to pursue cross-border mergers. At an annual Futures Industry Association conference this month in Boca Raton, Florida, top market executives highlighted the difficulties of international deal-making during a panel discussion.

‘Very Complex’

“Cross-border exchange consolidation is very complex,” said Nasdaq Inc. Chief Executive Officer Adena Friedman, who was on the panel. It involves hurdles including shareholders, regulators and politicians, who can sometimes show nationalist sentiment around assets like stock exchanges, she said.

Duffy was conspicuously absent, but at the same conference last year, he echoed a similar sentiment. “These are institutions that countries believe are part of their DNA,” said Duffy, 59, who built CME through big takeovers, including deals with the Chicago Board of Trade and New York Mercantile Exchange.

A tie-up of derivatives trading powerhouse CME and NEX could be buoyed by their complementary businesses. NEX, better known by its old name, ICAP, dominates electronic Treasury trading. Its fixed-income division is home to about 80 percent of trading volumes in a $14.5 trillion market. CME enjoys a near-monopoly over trading of Treasury futures. Putting cash and derivatives trading under the same roof at CME would save major banks millions of dollars a year by enabling them to set aside less collateral.

NEX shares surged 9.8 percent Wednesday in London, while CME was little changed at 1:14 p.m. in New York trading.

Small Comeback

The failed $13 billion merger of London Stock Exchange Group Plc and Deutsche Boerse AG cast a pall over the exchange world last year. The deal was addled by the U.K.’s surprise vote to leave the European Union and disagreement over where the combined company’s headquarters should be based. Since then, there’s been a small comeback: Amsterdam-based Euronext NV this month completed its acquisition of Ireland’s stock exchange, a hub for exchange-traded funds.

In an earlier era, big international deal-making among exchanges was more common. New York Stock Exchange owner NYSE Group Inc. bought Euronext in 2007, forming the first exchange operation to cross the Atlantic Ocean. After Intercontinental Exchange Inc. purchased the combined company, Euronext was spun off in an initial public offering in 2014. Nasdaq Inc. also managed to secure a cross-border deal in 2007, when it purchased Nordic exchange operator OMX.

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