CME Group to Acquire Kansas City Board of Trade

Posted October 18th, 2012 by The Options Insider in Industry

On Wednesday, CME Group (CME) announced they had signed a definitive agreement to acquire the Kansas City Board of Trade (KCBT).

According to a CME press release, CME Group will pay $126 million in cash for KCBT. In addition, KCBT will also make a special distribution of excess cash to members concurrent with the closing.

CME Group will also maintain a committee comprised of KCBT market participants to advise on HRW wheat contract terms and conditions for a minimum of three years. It will also maintain the KCBT trading floor in Kansas City for at least six months.

With the acquisition, CME will acquire KCBT's hard-red winter wheat futures contract and pair it with soft-red winter wheat that is currently trading at the Chicago Board of Trade.

The acquisition comes as CME faces increasing challenges from the IntercontinentalExchange Inc.(ICE). In May, it launched grain-futures contracts similar to CME's corn, wheat and soybeans products.

CME Group Executive Chairman and President Terry Duffy said of the acquisition, "Global agricultural market participants continue to depend on liquid, transparent risk management tools for price discovery in both established and emerging economies. Building on two rich legacies, the combination of KCBT Hard Red Winter Wheat products with our deep and liquid CBOT Soft Red Winter Wheat futures and options markets will provide new trading opportunities for market participants around the world – both on the trading floor and on the screen."

CME Group CEO Phupinder Gill added, "This transaction creates significant value for customers and shareholders of both companies. While the CBOT and KCBT Wheat contracts are very distinct products with different uses, the ability for producers and commercial participants to hedge their risk in both key benchmarks in one place will produce cross-margining benefits and other capital efficiencies,"

"In addition, product development opportunities here are great for both of our client bases – not only in futures, but also in options that can help market participants manage risk at a reduced cost during targeted timeframes in the crop year."

According to the Wall Street Journal's Jacob Bunge, Gill said that by offering the "hard" and "soft" wheat product contracts on one exchange, this will give farmers and grain buyers improved hedging opportunities against price fluctuations and "other capital efficiencies."

He added, via a reporters' conference call, that the acquisition will give CME an opportunity to create new products to benefit both futures and options clients.