CME Group, the world's largest and most diverse exchange, and the Brazilian Mercantile & Futures Exchange S.A. (BM&F), the world's fourth largest derivatives exchange and the largest derivatives exchange in Latin America, announced today that they have signed a non-binding letter of intent covering a proposed cross-investment between them.
Under the arrangement, CME Group will acquire an equity stake of approximately 10 percent in BM&F in exchange for an equity stake of approximately two percent in CME Group. The transaction is expected to be completed following the close of BM&F's initial public offering, which is expected to occur this year. The agreement would represent the first-ever cross-equity arrangement between a U.S. and Latin American exchange. The agreement will be exclusive to BM&F among exchanges in Central and South America, and exclusive to CME among exchanges outside of that region or China. The investment agreement will include a provision to permit termination if the agreements are not completed and the investment transaction is not closed by March 31, 2008.
The letter of intent also contemplates the establishment of an order-routing arrangement in which CME Group would connect its CME Globex electronic distribution network to BM&F, and BM&F would connect its distribution network to CME Globex, for the routing of orders for electronic trading of the products of both exchanges. The order-routing arrangement would be exclusive to CME as an exchange provider of order-routing services to BM&F outside of Central and South America, and exclusive to BM&F among exchanges in that region.
CME Group and BM&F also expect to enter into a memorandum of understanding covering the expansion of their commercial arrangements. Additional commercial arrangements to be considered include the following:
- CME Group to provide offshore collateral management services to the BM&F clearinghouses for non-Brazilian Real denominated collateral posted by BM&F customers outside Brazil;
- BM&F to become a "super-clearing" member of CME Group to facilitate access to CME Group products on behalf of BM&F market participants that lack independent arrangements with CME Group clearing members; and,
- CME and BM&F to establish a joint working group comprised of product development representatives from both exchanges. The joint working group will explore opportunities to develop and market new products for the Brazilian and Latin American markets to take advantage of the expertise, distribution and resources of both exchanges.
The BM&F Board of Directors will also include one director designated by CME Group and CME Group will establish a special board advisory committee to the CME Group Board, including representation from BM&F, to periodically evaluate progress on the CME-BM&F arrangements.
"We are very pleased that we are forging a long-term strategic partnership between CME Group and BM&F," said CME Executive Chairman Terry Duffy. "South America represents a key market of opportunity for CME Group as we seek to expand the reach of our benchmark products to customers outside the U.S. This agreement allows us to extend our products to potential new users in Brazil."
"With our historic merger with CBOT now completed, CME Group is continuing to aggressively execute our global growth strategy in important emerging markets. Today's announcement positions CME Group as the first global exchange to tap into the fast-growing Brazilian and Latin American markets," said CME Group Chief Executive Officer Craig Donohue. "With Brazil's emergence as the world's tenth largest economy, its growing capital markets, and its established commodity markets, we look forward to developing this link between our markets."
CME Group and BM&F are working toward signing definitive agreements. The proposed cross-investment and order routing agreement will only proceed if the parties sign definitive agreements, which are subject to completion of due diligence and final board approval by CME Group and BM&F. Closing of the equity exchange is also subject to the completion of BM&F's initial public offering, BM&F shareholder approval and other customary closing conditions, including Brazilian regulatory approval. There can be no assurance that any definitive agreements will be signed or, even if signed, that all conditions to completion will be met.