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U.S. editorial excerpts -4-.

NEW YORK, April 11 Kyodo

Selected editorial excerpts from the U.S. press:

THE FUTURE OF FUTURES (The Wall Street Journal, New York)

The New York Stock Exchange and Euronext completed their debut as the first trans-Atlantic stock exchange last week, but the bigger news is what NYSE chief John Thain is promising next. The Big Board's quest to become a player in the derivatives business shows how global and competitive the market for these complex financial instruments has become.

Let's hope regulators are paying attention, especially as they weigh antitrust concerns surrounding two high-profile takeover bids for the country's oldest futures market, the Chicago Board of Trade. The CBOT is mulling offers from its Windy City rival, the Chicago Mercantile Exchange (CME), as well as from electronic upstart Intercontinental Exchange (ICE). In today's cutthroat world of global finance, exchange consolidation is more necessity than choice, and either tie-up would bring efficiencies and opportunity for investors.

You can bet the CBOT's competitors realize the stakes, which is why they've been fanning antitrust anxieties, hoping to scotch the deal and forestall a tougher competitor. Like Mr. Thain, they can follow the money. Stock markets are crucial to raising capital, but their growth is limited by the number of companies that choose to go public, the economic health of a country, and such regulatory follies as Sarbanes-Oxley.

Derivatives, by contrast, are limited mainly by a lack of imagination. These days, hedge funds and other traders make bets on everything from interest-rate movements to how much snow will fall during ski season. These contracts hold profit potential whether world stock markets are booming or swooning. Global stocks were worth about $50 trillion last year, and bonds $65 trillion. The global value of derivatives contracts? Some $450 trillion, and exploding.

Yet derivatives exchanges are also facing the same pressures as their equity counterparts. For decades, regional exchanges relied on gentlemen's agreements to defend their turf. But technology has hurdled these walls, allowing competitors to offer services from anywhere on the planet. Markets like the CBOT have had to transform -- from membership clubs with floor traders specializing in farm products, into high-tech, electronic exchanges that wheel-and-deal in Treasury futures.

This competition has brought extraordinary benefits to investors by lowering trading costs, but it has also meant exchanges must grow to provide liquidity, develop new products, and seek efficiencies. Also driving the merger wave is the cash that exchanges have mined by becoming public companies themselves -- an innovation that itself has brought more accountability. The Chicago Merc's trailblazing decision to go public in 2002 gave it a competitive edge over the CBOT, putting it in position to offer its $8 billion buyout.

The worry is that all of this will confuse merger regulators, who prefer to focus on local market share. In this case, they've been furrowing their brows over the number 85% -- the percentage of the market for exchange-traded U.S. futures contracts that a combined CBOT-CME would hold. The concern is that an exchange that large would be able to unilaterally raise trading prices. This fear has given some momentum to ICE's own $9.7 billion bid, because an ICE-CBOT tie up would have only 33% market share.

(April 11)
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Publication:Japan Weekly Monitor
Article Type:Editorial
Date:Apr 16, 2007
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