CME says the combined company, called CME Group, will be one of the world's most liquid marketplaces, with average daily trading volume approaching nine million contracts per day.

The combined company is valued at $25 billion - with CME equity making up $18 billion and Cbot equity worth around $7 billion.

Under the terms of the deal, Cbot shareholders will receive 0.3006 share of CME class A common stock for each CBOT share, or an equivalent amount of cash.

The cash portion of the deal is subject to a $3 billion limit. If no shareholders elect to receive cash, CME shareholders will own 69% of the merged company and Cbot shareholders will own 31%, with CME issuing about 15.9 million shares valued at about $8 billion.

The deal values Cbot, which went public last year, at $151.27 per share, a 16.7% premium to its closing price yesterday.

In a statement, the exchanges says the merger will create a single company able to grow in an "increasingly competitive environment".

The combination is expected to be accretive to earnings in 12 to 18 months post close, says the statement.

The deal is also expected to generate pre-tax cost savings of more than $125 million beginning in the second full year following the closing, driven primarily by technology, administrative and trading floor-related cost reductions.

CME says the exchanges will consolidate trading floor operations into a single facility at Cbot, unify IT operations and eventually move Cbot products onto the Globex e-trading platform. All transactions will be cleared through CME Clearing.

The transaction is expected to close by mid-year 2007, pending approvals by regulators and shareholders of both companies, as well as completion of customary closing conditions.

CME chairman Terrence Duffy will become chairman of the combined company while Cbot chairman Charles Carey will become vice chairman. CME CEO Craig Donohue will serve as CEO of the new company. Cbot CEO Bernard Dan remaining in his current position to oversee Cbot's activities, products and customers until the transaction is complete, after which he will serve as special adviser to the combined company for one year.

The merger agreement, which comes amid increasing consolidation in the exchange sector, could increase pressure on the New York Stock Exchange to seal its deal to combine with pan-European stock and derivatives exchange Euronext.

Last week Germany's Deutsche Börse and Italian stock exchange operator Borsa Italiana said they has signed a letter of intent "aimed at creating a federal European exchange that includes Euronext". The German exchange also said it had notified the European Commission of its intention to buy Euronext.

Earlier this week the New York Exchange and Euronext offered to enter talks with the German exchange and Borsa Italiana on a four-way merger that would see Deutsche Börse sell its cash equity business to Euronext in return for a minority stake in the pan-European exchange.

But the German exchange rebuked the offer, saying it "does not consider contributing its cash equities activities into a Nyse/Euronext group an option".