CME Eyes Synergies in NEX Purchase


After confirming its plan to bid for NEX, the CME Group has made a $5.4 billion cash-and-equity bid for the foreign-exchange and rates trading venue operator.

If the proposed acquisition passes a NEX shareholder vote as well as gains regulatory sign-off, the deal should be completed sometime in the second half of the year, according to Terry Duffy, chairman and CEO of the CME Group.

The transaction should not come as a surprise given the tone that the CME Group’s management has been taking regarding being more open to acquisitions, wrote Kyle Voight and Matthew Moon, analysts at Keefe, Bruyette & Woods, in a research note regarding the deal.

Potential synergies have been a primary driver for the acquisition, according to industry insiders.

From a geography perspective, The CME would be able to capitalize on NEX’s global footprint, Donald Robertson, a senior vice president at Moody’s Investor Services to Markets Media.

“NEX is pretty strong in Europe as well as Asia,” he said. “These are both areas in which the CME Group hopes to grow further. NEX has a lot of on-the-ground contacts in these areas where the banks, for example, may use NEX’s products but may use the CME less effectively in the past. So the CME would certainly hope to leverage these relationships.”

From a business-line perspective, Robertson saw NEX’s business complementing those of the CME Group.

“Particularly concerning US Treasuries and derivatives and what NEX does in the spot market for these products,” he added.

With the addition of the NEX Markets’ BokerTec and EBS trading platforms, the CME Group estimates that its rates business would be second in revenue (28%) to its commodity business (30%). Post-trade, market and information services would be the third largest contributor (22%) followed by equities (11%), and FX (9%) business lines.

“It’s tough to know exactly what CME may have planned for the cash US Treasury market structure,” wrote Voight and Moon. “The Treasury market remains very bifurcated (dealer-to-dealer vs. client-to- dealer), with the dealer community clearing through the Fixed Income Clearing Corporation (FICC), and the buy side not clearing through the FICC.”

Moody’s Robertson doubted that the CME Group would look to clear Treasuries through its derivatives clearinghouse.

The CME has a cross-margin relationship with the DTCC, which lets CME member tailor their transaction to gain margining efficiencies, he told Markets Media. “There may be more of an opportunity for them to do that now with all these transactions all under one roof, but I believe that would take time to play out.”

CME Group’s Duffy noted that the exchange operator expects to achieve $200 million in synergies by 2021 with most coming from sales as well as general and administrative sources (45%). Savings from IT consolidation (35%) and operational functions (20%) would make up the rest of the savings.

“As one organization, we will be able to employ the complementary strengths of each company to serve a wider client base while diversifying our combined businesses across futures, cash and OTC products and post-trade services,” added Duffy in a prepared statement.

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