Chicago Mercantile Exchange Unveils For-Profit Plan - First Major U.S. Financial Exchange To Produce Blueprint For Converting From Member-Owned Organization To For-Profit Corporation

The Chicago Mercantile Exchange (CME) on November 2 unveiled a comprehensive plan to transform itself from a member-owned institution into a for-profit corporation. While many exchanges are considering a similar move, the CME's demutualization plan, presented to its members at their annual meeting late this afternoon, marks the first such blueprint for a major U.S. financial exchange. The plan, unanimously approved by the CME's board of directors following extensive discussions, calls for the conversion of membership interests into equity securities and aims to facilitate new business strategies and strategic relationships, as well as to improve and streamline the exchange's governance and management structure. "Given our history of innovation and leadership, it's no surprise that we're the first major U.S. exchange to take this critical step in preparation for a successful future," CME Chairman Scott Gordon said. "We have successfully transformed demutualization generalities into a concrete proposal." Gordon said the plan is the product of the exchange's comprehensive strategic plan, announced at last year's annual meeting and undertaken to address the profound changes that have been sweeping the financial services industry. The Strategic Planning Committee has been exploring the possibility of demutualization for more than a year, in concert with the CME's financial advisor, Salomon Smith Barney. CME Second Vice Chairman Jim Oliff, chairman of the exchange's Strategic Planning Committee, cited five major objectives the plan is designed to accomplish: Improve governance ; Create a strong financial decision making model; Facilitate the pursuit of new business strategies; Unlock the equity values of exchange members; Provide a signal and a currency for working with strategic partners. "The financial world is moving at Internet speed," Oliff said. "Our demutualization plan will give us the swift decision making capabilities and other tools we need to compete effectively and position the exchange as the preeminent global marketplace." Subject to member approval and upon consummation of the demutualization transaction, the CME would become a Delaware for-profit stock corporation in which the members would own two classes of common stock. They would receive shares of "Class B" common stock representing their existing trading rights and privileges plus equity, and shares of "Class A" common stock representing pure equity in the exchange. Eligibility for Class B share trading privileges would be subject to the same membership approval process currently employed by the exchange. Class A shares in the new for-profit corporation would be allocated to the exchange's Chicago Mercantile Exchange (CME), International Monetary Market (IMM) and Index and Option Market (IOM) members on a 3:2:1 basis. There would be multiple series of Class B shares to reflect the existing divisional structure and to preserve open outcry and electronic trading rights for owners of these shares. Members of the exchange's CME, IMM, IOM and Growth and Emerging Markets (GEM) divisions would receive Class B shares representing trading privileges and an allocation of the Class B share equity on a 3:2:1:1/6 basis. Under the plan, governance would be greatly simplified. The existing 39-member board would ultimately be cut approximately in half to a 19-member board, following a two-year transition period. The board's responsibilities would match those of other public corporations and would involve less of the day-to-day operations. The new for-profit entity would be run by a chief executive officer to be hired by the board. In addition, the exchange's more than 200 member committees would be eliminated and replaced with a greatly streamlined committee structure designed to efficiently manage key functions of the exchange. For corporate law reasons, the conversion to a for-profit entity would be a two-step process. It would also include a simultaneous acquisition of the exchange's PMT Limited Partnership, a for-profit subsidiary that governs the CME's GLOBEX2 electronic trading system. Exchange members holding PMT partnership units would receive Class A shares or cash in place of their units. The 3:2:1 ratio for overall equity distribution in the new plan corresponds to the original distribution of ownership of the PMT partnership. The consummation of the demutualization requires the accomplishment of a number of activities, including the preparation, filing and effectiveness of a registration statement with the Securities and Exchange Commission (SEC), the approval of the exchange's membership, and the receipt of a favorable ruling from the Internal Revenue Service regarding the tax consequences of the proposed transactions. It is expected that a membership vote would occur in the beginning of 2000 and that the transactions could be consummated in the first half of 2000. Votes on core issues at the exchange are weighted by division. A two-thirds majority is required on this issue. The Chicago Mercantile Exchange trades futures and options on futures on agricultural commodities, foreign currencies, interest rates and stock indexes, as well as credit and weather indexes. Any offering of securities described in this document will be made only by means of a prospectus filed as part of a registration statement under the Securities Act of 1933.