shares rebounded Thursday after a Keefe Bruyette analyst played down fears that regulators could throw a wrench into a potential merger.
Analyst Niamh Alexander upgraded CME Group to outperform with a price target of $675, after saying the Justice Department's recent concerns about the pairing of futures exchanges and clearing houses was unlikely to affect earnings in the near term. She reasoned that even if a change in the law took effect, it would not impact the earnings for another three years.
"We think that if anything comes from the
Justice Department review, if not a change to the CME model, perhaps a signal of a new stance on the part of the anti-trust regulators on merging of clearing houses, which may prove challenging for CME's proposed acquisition of the Nymex," Alexander wrote. "But then its specific exclusion of energy futures could contradict this."
The Justice Department, in a Jan. 31 letter to the Treasury Department, suggested that CME separate the clearing business from the exchange, reasoning that the futures market should be handled similarly to the equities market. CME stock fell nearly 17% Wednesday to a new 52-week low of $475.17, and Nymex fell nearly 14%. CME responded Friday by climbing 8.8% to $528.01; Nymex jumped 8.1% to $94.95.
According to Alexander, few others agree with the Justice Department, and separating futures exchanges from clearing houses doesn't seem to be a priority for the Treasury Department. Late Wednesday, Bart Chilton, commissioner at the Commodity Futures Trading Commission, released a testy letter addressing the Justice Department's concerns.
"The business model that the
Justice Department staff is now condemning received, only a few short months ago, the legal blessing of
Justice Departmentfollowing its extensive, comprehensive, and exhaustive review of the
Chicago Mercantile Exchange/Chicago Board of Trade merger," Chilton wrote.
The letter was actually in response to a broad request from the Treasury asking how to improve competitiveness and was among 300 submissions. It was published on Monday.
Chilton also questioned the timing of the letter, a response to a broad request from Treasury asking how to improve competitiveness, which drew 300 responses and was published Monday. He asked why it was raising the concerns just days after CME Group and Nymex announced they were discussing a potential merger. Treasury asked for comments by Nov. 21.
CME is upset, too. The company held a conference call yesterday to address the issue with shareholders. The company points to all the ways in which it facilitates expansion, but the company also points out that this system isn't broke, so don't fix it.
"The absence of cross-exchange fungibility has not impaired innovation or competition in the derivative industry," the company said in a statement. "New product and system innovation is unparalleled and customer fees and costs are close to insignificant in relation to the value of the services performed."
Indeed, the Atlanta-based
has been attempting to take market share. It made what appeared to be a token bid for Nymex, intended to derail the CME deal, since it didn't really have the capital. But IntercontinentalExchange isn't completely independent, as it has some of the big wirehouses backing its viability.
Keefe Bruyette's Alexander notes that because there will be a new president in 2009, any kind of thorough review of the relationship between clearing houses and futures exchanges is far off. In the meantime, the Justice Department's letter serves merely as an opinion offered to Treasury, which is under no obligation to act on it.
The Justice Department's letter, however, was not without consequences, the Commodity Futures Trading Commission's Chilton said.
Justice Department staff letter has, unfortunately, roiled the markets," he wrote. "This is precisely the kind of behavior that government regulators are supposed to take ordinary care and attention to avoid."