June 7, 2000

Wall Street Journal

Commodities

CME Overwhelmingly Supports For-Profit Plan

By Peter McKay

Chicago Mercantile Exchange membership-seat holders voted overwhelmingly yesterday to turn their nonprofit market into a streamlined business, making them the first U.S. derivatives-exchange members to endorse such a move.

In a member referendum, CME management's for-profit proposal passed by a vote of 5,361 to 74, with 18 abstentions. That translated into a whopping 98.3 margin of support that officials said was the widest of any ballot initiative in the exchange's 102-year history.

Traders had been anticipating that the CME proposal would win convincingly. The plan will now scrap the very system of direct democracy it used to gain approval, replacing it with what supporters say is less cumbersome decision-making needed to compete in a fast-paced electronic era.

"The resounding endorsement of demutualization by the members of the Chicago Mercantile Exchange brings the CME to the most significant turning point in more that 100 years of history and culminates two years of deliberative strategic analysis, planning and execution," CME Chairman Scott Gordon said in a statement.

Other large markets, such as the cross town CME rival Chicago Board of Trade and the New York Mercantile Exchange, have introduced similar plans, but have yet to seek members' backing for them.

"Overall, the sentiment here has been  pretty positive," said Ben Schwartz, an independent trader in CME's stock-index derivative pits. "If they had tried to do that a few years ago, members might have been more nervous. But I think people are ready for it now."

Deciding on whether to adopt the plan were 625 full CME members who each had six votes, plus 4,412 partial members each allocated smaller, varying amounts of votes depending upon which CME divisions they trade.

Pending favorable rulings by the Internal Revenue Service and Commodity Futures Trading Commission, the CME plan will create 25.9 million private Class A shares representing ownership in the exchange, plus several series of Class B shares representing trading rights. There will be limitations initially on trading the Class A shares, which would loosen incrementally over the course of 15 months.

Veteran members said that potentially lucrative possibility, plus the initial "stapling" of ownership to trading rights, would help the plan pass. In recent years, members at all the nation's major commodity markets have suffered through wild swings in the value of their seats.

At the same time, however, they've sometimes shied away from proposals that might eliminate their floor jobs in lieu of electronic trading, which most observers believe a for-profit firm would favor.

"Unless you have clarity of purpose for the whole exchange, the question of which electronic platform to adopt gets lost in the politics of which member factions benefit most from each particular platform," said Richard Sandor, a former CME director. "That' why the for-profit plan can only help."

Mr. Schwartz, 27 years old, said CME's political climate has become more receptive to for-profit and electronic proposals because of an influx of young traders in recent years and the online success of rivals, primarily in Europe.

Despite the relative delay of American markets, compared to early electronic rivals such as German-Swiss Eurex, CME member Steven Greenberg said CME's plan is still well-timed. "Things are going well, because we'll still be the first in the U.S. to demutualize," said Greenberg, president of Alaron Trading Corp., one of the few online Chicago futures brokerages. "If they only started thinking about this a year from now, that would have been a problem."