The IRS ruling confirmed that conversion of CME memberships into shares of a for-profit corporation qualifies for tax-free treatment.
The ruling satisfies the final condition for the “demutualization” of the not-for-profit, membership-owned organization. As a result, the CME will, effective Nov. 13, become a for-profit, shareholder-owned corporation. The new company will be called Chicago Mercantile Exchange Inc. The CME is expected to be the first major U.S. exchange to convert its membership interests into equity interests that can be traded separately from exchange trading privileges.
“This favorable IRS ruling allows us to carry out the mandate of the CME’s members, who voted overwhelmingly to transform our exchange into a for-profit enterprise,” CME Chairman Scott Gordon said. “Our forward-looking members recognized the importance of reinventing ourselves once again in this fast-changing competitive landscape. That innovative spirit has been key to our past success, and our new structure will help drive our future success.”
“Over the past year, we have begun the transformation of our governance and management structure, and our decision-making processes, toward those of a for-profit company,” CME President and CEO Jim McNulty said. “We are focused intently on being a premier global marketplace and an infrastructure provider and partner in the business-to-business marketplace.”
The exchange first filed a registration statement with the U.S. Securities and Exchange Commission (SEC) on Jan. 28. On June 6, exchange members voted to transform the 102-year-old institution into a shareholder-owned corporation. The 98.3 percent favorable vote was the highest margin of approval in the history of the CME. The Commodity Futures Trading Commission approved the applicable rule changes for the transaction on June 15.
An international marketplace, the Chicago Mercantile Exchange brings together buyers and sellers on its trading floors and GLOBEX2 around-the-clock electronic trading system. The CME offers futures contracts and options on futures primarily in four product areas: interest rates, stock indexes, foreign currencies and agricultural commodities. Members of the Chicago Mercantile Exchange 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 the 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 the 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.
