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The Financial Times reported that the US derivative exchange giant – NYSE Euronext Inc. has been pushed out of the London Metal Exchange (LME) buyout battle owing to its low bid price.

However, other potential buyers – Hong Kong Stock Exchange, CME Group Inc. (CME - Analyst Report) and IntercontinentalExchange Inc. (ICE - Analyst Report) – are still running neck-to-neck in the race. While NYSE’s bid was valued at £800 million ($1.28 billion), the other three bidders have reportedly made biddings worth over £1.0 billion

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 preliminary bid for LME started in September last year and was closed in February this year. While LME is mulling over the right price and future of the deal, the actual bid offers of the three remaining contestants remain undisclosed.

Scope of Growth for Derivative Giants

After the collapse of its merger deal with Deutsche Boerse, NYSE had 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 could have paved way for a new earnings opportunity, had the deal materialized.

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.

Besides, Hong Kong stock exchange is desperately looking forward to the culmination of this deal so that it can tap the volatile European markets to drive growth momentum in the markets of China.

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. Nevertheless, given the gravity of the changing business dynamics in this industry and the lucrative pricing of the bids, a final outcome is expected soon.

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