05 February 2010

Co-Authors

Justin Schack

Director, Market Structure Analysis

Joe Gawronski

President and COO

Rosenblatt Securities Inc.
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Rosenblatt’s Market Structure News Digest

Global Exchanges and Market Centers

CME Said to Consider $700 Million Payment for Dow Jones Indexes
-Bloomberg News

CME Group Inc., the world’s largest futures market, is in talks to buy the News Corp. stock-index business that owns the Dow Jones Industrial Average for up to $700 million, according to two people familiar with the matter.

Our Take: An interesting potential move for CME, from both an offensive and defensive standpoint. Although owning Dow Jones Indexes will cut long-term expenses because CME will no longer have to pay annual licensing fees to trade futures on the DJ Industrial Average (estimated at $30-35 million per year), buying the company also keeps it out of the hands of rivals. That’s no small consideration, especially after CME’s loss of the Russell indexes to ICE in 2008. ICE could have bid for DJ indexes to snatch away CME’s third-biggest equity futures product, though it’s unclear how a change of control would affect DJ’s long-term licensing agreements. And competitors such as NYX, NDAQ, DB1 and TMX Group (through its ownership of the Boston Options Exchange) may have seen ownership of the DJ index business as a way to enter the US listed index derivatives business, which is almost entirely locked up by CME, the Chicago Board Options Exchange and ICE, through their exclusive licenses with DJ, Standard & Poor’s and Russell. Another interesting aspect of such a move is how it might affect clearing of index-based derivatives. Last month LCH.Clearnet expressed concerns to the European Commission that DB1’s pending acquisition of European index provider STOXX might block it from receiving a license to clear STOXX index contracts and give a monopoly to DB1’s own Clearstream unit.