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The Financial Times reported that the US derivative exchange giants – NYSE Euronext Inc. , CME Group Inc. (CME - Analyst Report) and IntercontinentalExchange Inc. (ICE - Analyst Report) have submitted their bid for London Metal Exchange (LME). Including these firms, about 15 companies have shown interest in the first round of preliminary bid that started off in September last year and closed yesterday.

Founded in 1877, LME is the world's largest futures exchange, which offers futures and options contracts on base and other metals, which include aluminium, aluminium alloy, NASAAC (North American Special Aluminium Alloy), cobalt, copper, lead, molybdenum, nickel, steel billet, tin and zinc.

LME is owned by 93 members, the top most shareholders being JP Morgan Chase & Co. (JPM - Analyst Report) and Goldman Sachs Group Inc. (GS - Analyst Report) with 10.9% and 9.5% stakes, respectively, along with Barclays Plc (BCS - Analyst Report) and Citigroup Inc. (C - Analyst Report). LME is also one of the last member-owned exchanges in the world wherein trading is conducted through the open-outcry system in the ring by the ring dealing members. In addition to the 12 companies who have exclusive rights to trade in the ring, around 100 companies are involved in the LME in total. 

As the LME offers contracts with daily expiry dates of up to three months from the trade date, along with longer-dated contracts up to 123 months, it also allows for cash trading. Furthermore, it offers hedging, worldwide reference pricing and the option of physical delivery to settle contracts.

Accordingly, the bids made by NYSE, IntercontinentalExchange and CME estimate valuations worth £1.0 billion ($1.57 billion), signifying more than 15 times the last traded price before the sale process began. While the value of IntercontinentalExchange’s bid remain veiled, the company appointed JP Morganas its advisor for the bid.

While Deutsche Boerse and London Stock Exchange stayed out of the preliminary bid, the board of LME is expected to mull over the bids on February 23, 2012.

Scope of Growth for Derivative Giants

After the collapse of its merger deal with Deutsche Boerse, NYSE has shown significant interest in LME as this metal exchange’s business blends well with NYSE Liffe’s soft and agricultural commodity derivative business. NYSE Liffe is the former London International Financial Futures Exchange, which trades coffee, sugar, cocoa and wheat futures. While LME and NYSE Liffe already share the same storehouses for delivery of commodities, the combined trades could be cleared at NYSE Liffe Clear, which is currently at a nascent stage of growth. Hence, this effort should pave way for a new earnings opportunity, if the deal materializes.

On the other hand, addition of LME to CME’s basket could enhance its metals exchange, Comex. Hence, the deal is also considered important for other derivative exchanges, such as CME and IntercontinentalExchange, in order to boost their competitive strength in Europe.

While the owners of LME are apprehensive about safeguarding its business model, we believe the complex structure of its futures contracts and its network of registered warehouses could pose some issues in the business sale.

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