Counting on continued growth in the options market, Eurex set to acquire the ISE in $2.8 billion deal

In what is likely to signal new mergers and consolidation in the exchange market, Eurex has agreed to acquire the International Securities Exchange (ISE) for approximately $2.8 billion in cash. The combination will lay the groundwork for the largest transatlantic derivatives marketplace.

“This deal is primarily driven by our belief that this is going to be very helpful to grow our business,” says David Krell, president and CEO of the ISE. “We think there is a high potential for more order flow to come from outside the U.S. both into our derivatives business in options as well as our stock exchange business.”

He adds that as the world becomes more and more global, the Eurex merger fits in with the ISE’s international initiatives, giving the exchange a strong partner in Europe. Eurex is jointly owned and operated by Deutsche Borse AG and the SWX Swiss Exchange.

The combination will strengthen Eurex’s position in the U.S. with ISE’s 164 registered U.S. broker-dealers adding to Eurex’s 63 U.S. members, as well as adding 600 million traded contracts to those already originated in the U.S.

“We’re excited about launching new products together that will be available both in the Euro zone as well as in the U.S.,” says Krell. He sees opportunities for the ISE around additional asset classes such as fixed income, which Eurex is strong in, credit derivatives and currency options as well as jointly creating more indexes and index derivative products.

Brad Bailey, senior analyst at Aite Group, says this move was not surprising in today’s exchange landscape. “I would expect to see a lot more consolidation both across asset classes and across different regions,” he explains.

“The Deutsche Borse is paying a significant amount of money, but betting on continued strong growth in options,” says Bailey. “It makes sense as there are several forces coming into play in the U.S. options market that will continue to drive strong growth.” He adds that increased electronic trading, increased transparency and increased institutionalization around options are driving these opportunities.

“The volatility has picked up and volumes have also really been picking up,” he says, adding that overseas the options markets are also heating up with retail and institutional order flow playing more in the arena. “I do expect to see more of these types of deals. This will be an ongoing saga in 2007 as exchanges are going to need scale to compete and they’re going to be looking to grow in these new ways,” says Bailey.

Under the agreement, the ISE would continue to operate as a separately run SEC-regulated body and Krell says that so far no management changes are expected. Subject to regulatory and shareholder approvals, he expects the deal to close in the fourth quarter of 2007.

But rumors have also recently been hinting that the NYSE-Euronext could throw its hat in the ring for the ISE as well. Bailey says it wouldn't be a surprise if the Eurex bid prompted other exchanges such as the NYSE-Euronext to express interest in the ISE now that it's publicly in play.

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