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Ivy Schmerken
Ivy Schmerken
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Exchange Suitors Circle LME, But Deal Could Turn on Regulators and Clearing

A bunch of global exchanges, including the likes of CME and NYSE Euronext, are said to be submitting bids to acquire the London Metals Exchange, one of the last pit-based exchanges still standing.

International exchanges are throwing their hats into the ring to acquire the http://www.lme.com target="_blank">London Metals Exchange, one of the last pit-based exchanges still standing. Look for a deal to turn on regulatory approvals and cost-savings synergies as it relates to clearing.

CME is among the exchanges submitting bids to acquire the London Metals Exchange, the world’s largest futures metals exchange, while several other big exchange players are reportedly submitting bids including Deutsche Borse, InterContinental Exchange and Hong Kong Exchanges and Clearing Ltd. NYSE Euronext submitted an “expression of interest,” according to an anonymous source in today's Bloomberg Businessweek article.

But, it's become increasingly more difficult to consummate global exchange mergers as evidenced by the collapse of the proposed mergers between ASX-merger with Singapore Stock Exchange (SGX) and the TSX merger with the London Stock Exchange (LSE).

Only two weeks ago, the European Union rejected the merger between NYSE Euronext and Deutsche Borse, based on competitive issues in listed derivatives.

Despite the trend toward globalization and electronic trading, regulators are reluctant to lose control of their national exchanges. The main obstacle to any deal may be regulatory approval after the European Union earlier this month rejected the proposed merger of Deutsche Boerse AG and NYSE Euronext. In the past 15 months, $37 billion in proposed exchange industry takeovers failed.

Ironically, LME is considering an acquisition not because it’s been unsuccessful, but because it’s had record trading volumes and could be worth an estimated $1.3 billion, according to Diego Perfumo, an exchanges analyst at Equity Research Desk, a hedge-fund adviser in Greenwich, Connecticut, quoted in the Businessweek story.

As for which exchange could be the ideal suitor, ICE “brings the most to the table in terms of ease of transfer to its UK-based commodities focused platform, potential revenue and cost synergies,” wrote Niamh Alexander, KBW’s analyst in a report issued last night.

"Within two years of acquiring NYBOT, ICE had moved the majority of that soft commodity complex volume onto screens, effected fee increases, and brought the products into its own central clearing house which also boosted revenue on the platform", wrote KBW’s analyst in a report issued last night, citing the historical precedence of ICE’s acquisition of NYBOT. LME currently clears its trades through LCH.Clearnet, and so one of the potential cost saving measures in any merger is for the acquirer to bring LME’s clearing activity in-house and add the “predominantly pit-traded products to a more widely distributed electronic platform.”

Other potential interested parties might include CME Group, and NYX, which KBW said could also make accretive deals at similar price levels. KBW suggests that ICE has more synergies with LME than the other potential suitors. But CME also had the experience of acquiring COMEX and integrating that metals business onto its Globex electronic trading platform and into its clearing platform However, it’s also possible that no deal will occur and that LME members will retain their ownership structure and decide to continue to invest in building their own clearing platform.

Stay tuned for developments as LME has said it will review the bids in a Feb. 23 board meeting.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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