“This is a historic and awe-inspiring moment for CME, and the culmination of more than two years of tremendous effort and sweeping change,” Chairman Scott Gordon said. “Demutualization is the latest milestone in our more than 100 years of innovation. Today, CME has reinvented itself as a shareholder-owned enterprise.”
“Our new for-profit structure has several key benefits,” President and CEO Jim McNulty said. “It encourages a greater level of fiscal discipline, enables us to more aggressively pursue new business opportunities and helps solidify CME’s position as a premier global marketplace. We believe the net result will be long-term value for our shareholders.”
“Today, we are celebrating the birth of Chicago Mercantile Exchange Inc.,” said Second Vice Chairman James Oliff. “This event is happening because of our forward-thinking members, who had the vision to vote CME into the for-profit world.”
The stated goals of demutualization include restructuring governance, streamlining CME’s decision-making processes, changing its financial model to that of a for-profit corporation, providing currency for working with strategic partners, unbundling members’ equity value and supporting the exchange’s expansion by giving it access to the capital markets.
CME Stock
To complete the demutualization transaction this month, CME converted itself into a publicly held, for-profit corporation in several steps. The Illinois not-for-profit corporation initially was merged into a new Delaware non-stock corporation and immediately thereafter into a stockholder-owned, for-profit Delaware corporation. In a final step, recapitalization, CME then issued Class A and Class B shares. In addition, CME is now subject to the periodic reporting requirements of the Securities Act of 1934.
CME today is issuing nearly 26 million Class A shares to its members, representing pure equity rights. The shares were allocated on a 3-2-1 basis to members of the CME, International Monetary Market (IMM) and Index and Option Market (IOM) divisions. Transfer restrictions prohibit the independent sale or transfer of any Class A shares for the next six months. The restrictions will be eliminated gradually over the following 15 months. During the initial period in which transfer restrictions are in place, CME management will undertake marketing, educational and promotional efforts with analysts and investors to communicate the value of the Class A shares. Chase Mellon Shareholder Services has been named the transfer agent for the Class A shares (www.chasemellon.com).
In addition, CME is issuing about 5,000 Class B shares to its members, representing trading rights. Holders of Class B shares are able to sell, lease, transfer or bequeath their trading rights on the exchange, just as they did before with memberships or “seats.” Anyone will be able to own a Class B share, but those who exercise trading privileges must first be approved by CME. CME serves as the transfer agent for Class B shares. The demutualization transaction does not represent an initial public offering (IPO).
Other Changes
In planning for demutualization, CME has begun making extensive changes in its governance and management structures, as well as its corporate culture and strategic plans:
- Over a two-year period, positions on the Board of Directors will be reduced in size from 39 to 19. As the first step, CME’s annual meeting and election on April 18, 2001 will reduce the Board to 30 positions.
- In August, CME’s Board approved an 85 percent reduction in the number of existing committees, replacing them with 14 streamlined and consolidated committees. To reflect CME’s new status as a public company, the list now includes audit, board nominating and compensation committees.
- This year, the exchange revamped its management structure and recruited several key employees, including President and Chief Executive Officer McNulty, who joined the exchange in February.
- In May, McNulty and the management team introduced a new mission statement that emphasizes an intense customer focus. They also delivered to the Board a five-year vision and 18-month action plan. Among CME’s new business initiatives are entry into the fast-growing business-to-business (B2B) marketplace. In August, the exchange’s intensified customer focus led the Board to expand customer access to CME’s electronic trading systems, as well as customers’ trade execution choices in key CME products.
CME was the first major U.S. exchange to announce a concrete plan to demutualize. This plan was the result of a year-long strategic planning initiative and vote of its Board of Directors in October 1999. The exchange first filed a registration statement with the U.S. Securities and Exchange Commission (SEC) on Jan. 28, and the SEC declaration of the effectiveness of that statement, as amended on April 25, paved the way for a membership vote on June 6. At that time, 98.3 percent of the members voted to demutualize – the highest margin of approval in CME’s history. CME received a favorable tax ruling from the U.S. Internal Revenue Service (IRS) on Nov. 7 confirming that conversion of exchange memberships into shares of a for-profit corporation qualifies for tax-free treatment.
An international marketplace, Chicago Mercantile Exchange Inc. brings together buyers and sellers on its trading floors and GLOBEX®2 around-the-clock electronic trading system. CME offers futures contracts and options on futures, primarily in four product areas: interest rates, stock indexes, foreign currencies and agricultural commodities. CME members include the world’s largest banks and investment houses, as well as independent traders and brokers. All over the world, pension funds and investment advisers, portfolio managers, corporate treasurers and commercial banks trade on CME as an integral part of their financial management strategy. In 1999, more than 200 million contracts with an underlying value of more than $138 trillion changed hands at CME – more than seven times the gross national product of the world’s five largest economies. The exchange moves about $1 billion per day in settlement payments, manages $20 billion in collateral deposits and administers more than $1 billion of letters of credit.
