CME Group faces battle in bid to shrink board

CHICAGO Tue May 20, 2014 4:50pm EDT

CHICAGO May 20 (Reuters) - CME Group Inc, the world's largest futures market operator, aims to win shareholder approval on Wednesday to halve the number of board members who represent Chicago Mercantile Exchange users.

Trimming three of the six board members who represent market users would help the company, which owns the Chicago Mercantile Exchange and four other markets, reduce what is the largest board among companies that make up the Standard & Poor's 500 Index. The board is set to drop to 24 directors from 29 this year, still topping the next-largest board at BlackRock Inc by five members, according to Institutional Shareholder Services.

Company executives are expected to face questions from investors about the proposal at Wednesday's annual meeting in Chicago. At least three directors, three candidates for CME's board, and five former board members have publicly opposed the plan.

CME, which launched its first overseas market in London last month, argues the company's growth has eliminated the need for six directors representing one exchange. Keeping three will maintain "the appropriate expertise," according to the company. If approved, the reduction will take effect next year.

"It reflects the evolution of the company away from its member-owned roots and away from sort of the traditional community of liquidity providers," said Craig Pirrong, a finance professor at the University of Houston.

The directors, known as B-shareholder representatives, are often linked with traders who built their careers in open-outcry pits. Their influence has waned due to the rise of electronic trading, with about 86 percent of CME's business executed electronically, up from less than 15 percent in 2000.

Individual CME memberships, which provide discounts on trading, became attached to "B shares" when the Chicago Mercantile Exchange went public in 2002.

Traders say B-shareholder directors remain important because of their deep understanding of the futures industry. Other board members include Dennis Hastert, a former speaker of the U.S. House of Representatives, and Dennis Chookaszian, a former CNA Financial Corp boss.

"The board is getting rid of the wrong people" by cutting B-shareholder representatives, said Ray Cahnman, a former Chicago Board of Trade director who is running for CME's board.

Cahnman said that, if elected, he will push CME to buy all the B shares and rent trading permits to increase revenue. CME should eliminate the category for B-shareholder representatives on the board and all candidates should compete for the same spots, he said.

CME declined to comment on B-share purchases. Executives have previously been cool to the idea.

Still lacking on the board will be a representative of a high-frequency trading firm. The practice that accounted for about 30 percent of CME's volume in the first quarter.

"It's good to have a mix of people from the outside and true insiders who understand the business," said Jeff Carter, a former CME director who opposes the proposal to reduce B-shareholder representatives. (Editing by Matthew Lewis)

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