February 23, 2000

In late January, the Chicago Board of Trade’s board approved a demutualization plan that calls for the exchange to separate its open outcry and electronic trading businesses. If the CBOT’s current restructuring plan gets the green light from the exchange’s members, the Board of Trade Clearing Corp. (BOTCC) and Eurex—two of the CBOT’s key technology partners—will come along for the ride. The BOTCC, the long-time clearing arm of the CBOT, will provide clearing services for both the exchange’s open outcry company and its planned electronic trading unit. The trading engine of Eurex, meanwhile, will be the backbone of the CBOT’s new electronic trading company—tentatively dubbed EBOT.

Eurex, the all-electronic German/ Swiss derivatives market that agreed on a technology partnership with the CBOT last June, is still scheduled to roll out its trading engine and application programming interface in place of the CBOT’s Project A this summer. But if the for-profit strategy is approved, the Eurex engine will eventually serve as the heart of EBOT, and the exchange will have to work with the BOTCC and CBOT to build an interface that allows for the efficient routing of trades from EBOT to the BOTCC.

Dennis Dutterer, president and chief executive officer of the BOTCC, says that clearing and settling contracts traded over the Eurex system—instead of Project A—will not require the clearing firm to make any major technology changes. But he acknowledges that the BOTCC will have to tweak the mechanism it uses to import trades. “The way they plan to send us a trade from the new Eurex system will look different than the way they send us a trade from Project A. But we have agreed to build something on our side to take a trade in differently,” says Dutterer.

In the post-demutualization CBOT world, the BOTCC would be clearing and settling trades routed from multiple exchanges. But that would not be a totally new experience for the clearing firm. Currently, the BOTCC clears trades for both the CBOT and the MidAmerica Commodity Exchange—a small subsidiary of the CBOT. “The MidAmerica is a separate exchange, with separate legal matters and a separate membership. Yet we clear for both exchanges via a single system today,” notes Dutterer.

What’s more, on top of clearing for the CBOT’s open outcry pits, the BOTCC also clears an average of 50,000 contracts a day from Project A. With that experience in hand, Dutterer says that the BOTCC is not concerned about a potential volume upswing that could occur as a result of the CBOT’s separation strategy. “We are prepared to handle huge volumes. You could double what the CBOT does now, and we could handle that tomorrow,” he says.

Members of the CBOT, in accordance with the exchange’s for-profit plan, will receive equity in both the open outcry and electronic trading units. A CBOT spokesperson says that an allocation committee, comprised of public directors of the exchange, is currently devising a scheme to divvy up the shares for the two separate companies. The committee is expected to present its equity distribution plan to the exchange’s board sometime in February.

The CBOT has scheduled two separate member votes, one on its initial for-profit strategy and one on its final plan. The second vote is expected to take place in the fourth quarter.