CBOT says ICE merger would put exchange at risk

A trader at the Chicago Board of Trade signals an order shortly after the opening bell in Chicago March 30, 2007. The risks to the Chicago Board of Trade's futures trading business from a proposed takeover by IntercontinentalExchange Inc. could be catastrophic, given the hostile bidder's current technology, officials at parent CBOT Holdings Inc. told members on Wednesday.

CHICAGO (Reuters) - The risks to the Chicago Board of Trade's futures trading business from a proposed takeover by IntercontinentalExchange Inc. (ICE.N) could be catastrophic, given the hostile bidder's current technology, officials at parent CBOT Holdings Inc. BOT.N told members on Wednesday.

"We're not talking just about a dip in sales here, but the potential permanent loss of our liquidity pools," Chief Executive Bernard Dan and Chairman Charles Carey said in a letter being distributed on the CBOT's trading floors.

"Our entire franchise would be at risk," they added.

ICE is seeking to trump an offer by the Chicago Mercantile Exchange CME.N to buy CBOT, parent of the No. 2 U.S. futures exchange.

CBOT's board endorsed CME's offer in mid-May after the Merc sweetened the terms of its original bid from October.

CBOT members and shareholders and CME shareholders are scheduled to vote on the deal on July 9. The companies said on Wednesday that they will start mailing out the joint proxy statement relating to the merger on or about June 8.

The merger, which would create an exchange that has more than an 85 percent share of the U.S. futures market, also requires approval from the U.S. Department of Justice.

"We expect to hear from the DOJ on its antitrust review ... before the vote," Dan and Carey said, adding that they expect Justice to approve the deal.

Wednesday's commentary is the first extensive response from CBOT management since top ICE officials met with several hundred CBOT members on May 31 to make their case for an alternative merger.

"In our view, ICE Chairman and CEO Jeff Sprecher ... provided some misleading commentary on several issues," Dan and Carey said.

They disputed Sprecher's suggestion that CBOT did not engage ICE in serious negotiations after the Atlanta energy exchange made its unsolicited bid in mid-March.

"We negotiated hard, and in good faith, with ICE," Dan and Carey said. "Mr. Sprecher and his advisors remained rigid in their negotiating posture, refusing nearly every request we made to him and his representatives to improve ICE's offer."

Dan and Carey said CBOT's management team had cited "very substantial execution risks" in shifting the exchange's huge futures and options trading volume to ICE's current platforms.

CBOT's derivatives trades would be cleared at the New York Board of Trade clearing house -- but CBOT often trades as much volume in a single day as NYBOT trades in a month.

"If the necessary changes in these systems were not properly designed, funded and timely implemented," Dan and Carey said, "the risk to our business could be catastrophic."

In late trading on the New York Stock Exchange CME shares were up $3.63, or 0.7 percent, at $542.04. CBOT was up $1.94, or 1 percent at $199.07, with ICE up $4.70, or 3.2 percent, at $153.46.