The combined entity will be able to offer new post-trade support for futures, cash and over-the-counter (OTC) instruments.
Derivatives exchange operator CME Group Inc. is set to acquire NEX Group plc for an estimated $5.5 billion and, if all goes well, the combined provider of transaction processing across futures, cash and over-the-counter (OTC) instruments will be able to offer many post-trade capabilities beyond clearing services.
The CME Group encompasses: CME Clearing; the Chicago Mercantile Exchange (CME), overseer of the CME Globex electronic trading platform; the Chicago Board of Trade (CBOT); the Kansas City Board of Trade (KCBOT); the New York Mercantile Exchange (NYMEX); and the Commodity Exchange, Inc. (COMEX).
Formed via acquisitions, the NEX Group consists of Abide Financial, EBS BrokerTec, ENSO, Euclid Opportunities, NEX Data, NEX Exchange, Reset, Traiana and TriOptima.
The NEX Group’s major lines of businesses are:
— NEX Markets: Based upon EBS Brokertec, this division offers electronic execution platforms and services that are venues for foreign exchange and fixed income products.
— NEX Exchange: Based upon the venerable ICAP Securities and Derivatives Exchange (ISDX);
— NEX Optimisation:
o TriOptima (provider of post-trade infrastructure and risk management services for the OTC derivatives market: triReduce multilateral portfolio compression; triResolve portfolio reconciliation, repository reconciliation and margin management; triCalculate XVA risk analytics; and triBalance counterparty risk rebalancing;
o Traiana (cross-asset risk management and pre/post-trade processing, for listed and OTC transactions);
o NEX Data (pricing, analytics, index and regulatory reporting solutions);
o Reset (risk mitigation services);
o ENSO (treasury and portfolio finance solution targeting hedge funds);
o and NEX Regulatory Reporting (formerly Abide Financial).
— NEX Opportunities:
o Euclid Opportunities: NEX Opportunities invests in financial technology companies such as Duco.
Complementary Strengths
Terry Duffy, chairman & CEO, CME Group
“As one organization, we will be able to employ the complementary strengths of each company to serve a wider client base while diversifying our combined businesses across futures, cash and OTC products and post-trade services,” says Terry Duffy, CME Group chairman and CEO, in a prepared statement.
Following recent reports, CME Group and NEX Group have agreed to a transaction “valued at £10 [$14.06] per share, consisting of 500 pence in cash and 0.0444 CME Group shares (based on CME’s closing share price of US$158.84 on March 28, 2018 and the exchange rate of US$1.4101: £1, on March 28, 2018),” officials say.
“The transaction is expected to be immediately accretive to adjusted cash earnings per share, with run-rate cost synergies of $200 million annually by the end of 2021, assuming deal completion in 2018,” officials add.
The boards of directors of both companies have unanimously approved the transaction, which is slated to close after regulatory and NEX shareholder approvals during the second half of this year, officials say. The combined entity to come will have London as its European headquarters.
This acquisition will bring together NEX’s electronic foreign exchange (FX) and fixed income cash execution platforms with CME Group’s trading technology, officials say. The acquisition will also unite NEX’s OTC post-trade products and services with the CME Group’s derivatives clearing services.
“Combining these solutions will strengthen the NEX compression, reconciliation and processing businesses,” officials say. “The combination will also facilitate the development of innovative post-trade services and data offerings to further enhance cost-effective trading and risk management.”
Overall, officials say the acquisition will yield:
- Streamlined access and new trading opportunities across cash, futures and OTC marketplaces;
- New efficiencies and risk mitigation services via clearing and post-trade services across listed, cleared OTC and bilateral OTC marketplaces;
- New fixed income opportunities “as clients look to manage risk as the Fed unwinds its balance sheet and the U.S. budget deficit grows;
- Trading opportunities in an FX marketplace;
- Continued BrokerTec clearing via the Fixed Income Clearing Corp. (FICC) “with a goal to increase capital efficiencies for customers;”
- The scaling of NEX’s compression, reconciliation and processing services;
- More market data offerings;
- An expansion of the CME Group’s FX business “beyond futures to spot products, and broadens Treasury offering to include cash products;”
- An introduction of futures to the NEX user base, “particularly in FX trading;”
- And a bigger international footprint and more sales team and relationship-based trading capabilities;
Michael Spencer, CEO, NEX Group
After the acquisition in finalized, Michael Spencer, CEO of the NEX Group, will join the CME Group Board of Directors, officials say. Spencer will stay on as a special adviser, “working to drive the integration and continued evolution of the NEX businesses. He also will be ambassador for the combined company, working with key clients, regulators and officials in EMEA and Asia,” officials add.
“The combination of NEX and CME will be an industry-changing transaction,” Spencer says in a statement. “Bringing together cash and futures products and OTC services will be unique, offering clients improved access to trading, greater financial efficiencies and highly valuable data sets. The technology and innovation opportunities will be diverse and extraordinary. Clients will be better served.”
The team behind the transaction includes J.P. Morgan as lead financial advisor, Barclays as financial advisor to CME Group, and Skadden, Arps, Slate, Meagher & Flom LLP as CME Group’s legal advisor, officials say. Evercore and Citi have been retained as financial advisors to NEX, and Clifford Chance LLP is acting as NEX’s legal advisor.
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