Charlie Carey and Terry Duffy: Dynamic duo bends laws of (exchange) physics

Futures, Fall 2007 by Szala, Ginger

Some might say the reason for the merger of the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) were hogs. More specifically, the hog futures pit at the CME where then CBOT member Charlie Carey went to go trade when the grains were a bit slow in the early 1980s.

"We both had a passion for markets, and we both had a passion for agricultural markets," CME Group Executive Chairman Terry Duffy says today, remembering when his friend Carey and he were locals in the hog pit that started a long friendship that was the lynch pin for the coming together of two great Chicago exchanges that today form the largest futures exchange in the world.

The two men socialized throughout the years, while Duffy followed his path to become CME chairman in April 2002, and now CME Group, Carey followed his path to become chairman of the CBOT in March 2003.

"That's where the friendship began and because we came from the same school of thought that your word was your honor as you made a transaction. That served us very well in our roles in leadership as exchange chairman to get other things done for the benefit of not only the members/customers but shareholders as well," Duffy explains. "So anytime we had a conversation, we never had to worry about whether it was a genuine conversation or was someone playing the other person."

For years the exchanges had competed over products and volume, causing rancor between the two memberships. So how did these two men rise above the years of discord?

"I never understood why there wasn't more cooperation between the two exchanges," Duffy says. "As a young trader I couldn't comprehend why [working together] couldn't happen. You would hear conversations about the exchanges talking [to each other] but they couldn't do it because this exchange stood for this and that exchange stood for that. I never got that. So when I got into a position of leadership I never had to think about what were the obstacles back then because 1 never believed in them."

Apparently, neither did Carey who says that just over a month after he became CBOT chairman, the board decided to do the clearing deal with the CME. "Clearing was the first major initiative, and really that was picking the ball up because we made a platform decision in January, and we decided to look at the whole [landscape]. Our management thought that we could [do a clearing agreement], and it brought a lot more value to the user as well as the owner. I was a big part of that decision making, and because Terry and I had a good relationship, we were able to consummate that deal in five weeks."

Getting the boards behind them didn't seem to have the acrimony of the old days, when discussions were typically nixed early in the process. Carey says he didn't have a problem at the time because the CBOT was in a tough competitive position. A lot of people were saying how the Eurex juggernaut was going to put the CBOT out of business, so the CBOT board was in a mood to clear the way, so to speak. Further, relations with the Board of Trade Clearing Corp., the exchange's clearing entity, had sunk to an all time low. "We had no representation....no one has one customer and says you can't have representation on [the board]," Carey reflects.

At the CME, it was a little tougher. "As I recall, when we ironed out the clearing agreement, there were a lot of people who thought it would be another wasted effort with the CBOT," Duffy says. "And I said no, it was different with Charlie leading the initiative. The industry cried for common clearing in the 1990s, and we never did it, and now we had the opportunity to do it...and the users of the two organizations would benefit. My board went back and forth on it in a couple ways but again I never stopped my thought process of moving forward because I never thought about the history with the CBOT and I didn't care about the history, because I thought most of it was folklore anyway. I just relied on Charlie being genuine and I knew he was sincere when he said he had the support of his organization."

Was a merger in the cards then? "In the back of your mind you would like to think we would like to do a transaction, yeah, but the reality was the CME [was] a public company for just over a year and some change," Duffy explains. "We were just starting to see great value after the IPO with the appreciation in our stock and the CBOT had to do what they had to do to get a proper valuation before anything was going to happen. And if anyone [thought] we we're going to do a transaction pre-IPO was dreaming because it just wasn't going to happen."

Carey adds, "We were taking on enough risk just taking on clearing."

MERGER TALKS

The merger between the two exchanges was not as swift as the clearing move, and had a curve ball thrown into the process.

"Consolidation had been happening in Europe; it hadn't happened in the U.S. and then suddenly (NYSE CEO John Thain) made his move [with Euronext], and that was really the shot across the bow," Carey says. "So everybody on the board of directors knew we had to have scale to compete on a global basis. We went public in October of 2005 and that December board meeting was entirely devoted to the landscape: who would be an appropriate partner, what would create the highest value, what's the value of your enterprise, what's the value of ours? It became the focus of the Chicago Board of Trade, because we felt consolidation would take place."