After years of on-again, off again merger rumors, Chicago’s futures markets have finally cinched a deal that will make the Windy City into the world’s risk management capital — perhaps more so than London, Amsterdam or Frankfurt where their rivals reside.

The merged company, to be headquartered in Chicago, will offer customers global access to exchange-traded derivatives based on the U.S. interest-rate yield curve, equity indexes, foreign exchange, agricultural and industrial commodities energy and alternative investment products such as weather and real estate.

The combined company, to be named CME Group Inc., will have average daily trading volume of nine million contracts and a market value of $25 billion. This is higher than the nearly $20 billion market cap of the proposed NYSE-Euronext deal, or the $16 billion market cap of Deutsche Borse, according to the CME-CBOT presentation slides.

Joining forces could also lead to some cost savings in information technology and operations. The CME-CBOT combination is expected to result in pre-tax cost savings of $125 million from administrative and IT costs in the second year after the closing. Of the total, 50 percent of the savings are technology-related, 35 percent are administrative and 15 percent are due to combining trading floor operations, the release stated.

Plans are to move CBOT products onto the CME Globex electronic trading platform and consolidate all open-outcry trading on CBOT’s trading floor, while clearing all transactions through CME Clearing.
Despite their rivalry, the two exchange began working together in 2003 when they agreed to an historic common clearing arrangement, resulting in the CME clearing all CBOT Trades since January of 2004.

In a commentary on the merger, Adam Sussman, TABB Group Senior Analyst, writes that the CME-CBOT merger
“is almost 20 percent larger than the next biggest deal in the exchange sector, NYSE Euronext.”

“But the biggest threat to the merger does not come from any competitor, but from the Department of Justice,” writes Sussman in his commentary, noting that the CME and CBOT trade a lot of interest rate products and “there could be concern about a lack of competition in those products.” On the other hand, Sussman points out that there is nothing in the CME Group proposal to prevent another organization from inventing a unique financial instrument.

“Growth in the global derivatives industry is accelerating and new competitors are emerging in exchange, over-the-counter and other unregulated markets,” stated Craig Donohue, CME CEO in the release, who will become the CEO of the combined company. “As a combined company, we will be better positioned to capitalize on these trends and compete more effectively as our industry continues to transform,” Donohue added in the release.

What’s more, the deal is occurring at a time when exchanges are going public and pursuing faster growing derivatives markets which are of interest to hedge funds that trade across multiple asset classes. The question is could CME and CBOT afford to remain independent while their competitors shop for acquisitions in the derivatives sector?

One of the reasons NYSE Group agreed to merge with Euronext was that it owns LIFFE, the derivatives exchange. Meanwhile, Deutsche Borse, which is still trying to scuttle the NYSE-Euronext deal, last week teamed up with Borsa Italiana to suggest a federation of European exchanges. In addition, The Nasdaq Stock Market owns more than 25 percent stake in the London Stock Exchange, and is planning to start its own equity options exchange.

With six U.S. equity options exchanges trading the same products, there could be acquisition activity in that sector next. Chicago Board Options Exchange (CBOE) is inching closer to becoming a public company, writes Sussman, adding that smaller exchanges could band together. As sign of that activity, CBOE seats have traded at record highs — topping $1.5 million, rising 72 percent more than the year’s initial sale price of $875,000, which took place on Jan 5.