ISE merges with Eurex

Frankfurt-based Eurex has agreed to pay $2.8 billion in cash, or $67.50 per share, for New York-based International Securities Exchange. Frankfurt-based Deutsche Börse and Zurich-based Swiss Exchange – the two exchanges that jointly operate Eurex – will provide 85% and 15% of the financing respectively. The merger, which was announced today, is subject to shareholder and regulatory approval, and given that, it is expected to close by the fourth quarter of this year.

Andreas Preuss, chief executive of Eurex, emphasised ISE’s role in the equity derivatives market as a major reason for the tie-up. "The deal we have entered into is focused on becoming the [established] world leader in equity derivatives trading,” he said, speaking at a press conference in New York. “We are true believers that with the combination of two exchanges, we will see a positive impact on product innovation, functionality innovation and market coverage.”

ISE handled 32% of all equity options traded in 2006 – four percentage points more than the next largest player, the Chicago Board Options Exchange (CBOE). However, the CBOE leads the ISE by market share of equity derivatives trading overall.

Speaking to Risk, Gary Katz, ISE’s chief operating officer, also pointed to the credit derivatives market as an important source of growth and knowledge-sharing for the combined companies. On March 27, Eurex began listing three futures contracts referencing the Frankfurt-based International Index Company’s iTraxx Europe, Crossover and HiVol five-year credit default swap indexes.

“Eurex is clearly one of the pioneers of creating exchange-traded derivatives products. And credit derivatives are already trading on the exchange. That is a product we could list on the ISE – in its current form or in some other form. But they have an expertise in that product we would like to leverage. Being able to work with a team that has already started trading the product is clearly beneficial,” he said.

Katz added that the two firms will begin sharing knowledge on the product immediately, now the merger is public. However, for regulatory reasons, there are certain issues they are not allowed to discuss, such as pricing.

Elsewhere, both exchanges have been in separate talks with Japan-based Osaka Securities Exchange about a potential partnership. Preuss believes the ISE-Eurex merger will not impede those talks. “I’m convinced the joining of ISE and Eurex will make the combination of our two exchanges an even more attractive partnership for the landscape of derivatives exchanges around the globe, including exchanges in Japan,” said Preuss.