UPDATE: CBOE Sees No Threat From An S&P-Dow Jones Index Deal

The parent of the Chicago Board Options Exchange said Wednesday its long-running license to trade options on the Standard & Poor's 500 stock index would not be threatened by a potential deal combining the index with the Dow Jones Industrial Average.

Such a deal, reported last week by The Wall Street Journal to be under discussion, could give Dow Jones Indexes owner CME Group Inc. (CME) more sway over how the S&P indexes are used in derivatives trading. CBOE shares fell 4.9% the following session.

"This would have no immediate effect on our license," said Richard DuFour, head of corporate planning and development for CBOE Holdings Inc. (CBOE), speaking at an investor presentation Wednesday. "Our license provides for any change of control."

CME and McGraw-Hill Cos. (MHP), which owns Standard & Poor's, on Wednesday declined comment on the matter.

The CBOE's nearly 20-year-old arrangement to exclusively trade options on the S&P 500 is critical to the company, which went public last year. Contracts linked to the index's value make up its most heavily traded market and contribute about 22% of the CBOE's transaction revenues, according to an estimate from Evercore. This week the CBOE launched a long-awaited electronic version of the options on its new venue for automated trading, called C2.

The license grants the CBOE exclusive rights to trade the popular contracts through 2018, and until 2022 on a non-exclusive basis, should S&P decide to give other exchange groups a crack at trading the contracts.

DuFour said Wednesday that he saw "nothing but positives" should CME and McGraw hill agree to an index deal, which people familiar with the matter have said could give CME a 25% stake in a new joint venture that McGraw-Hill would manage.

"The CME understands as well as we do the synergies between our products and theirs," said DuFour. Chicago-based CME's most heavily traded stock-index futures are based on the S&P 500 index, and DuFour said the same banks and firms trade heavily in both derivatives markets.

"There's no particular advantage to be gained in splitting up the liquidity," said DuFour.

CBOE shares were up 1.2% Wednesday at $24.60.

DuFour said that Standard & Poor's has benefited from the CBOE's stewardship of the index options. The exchange pays S&P royalties on each contract traded and the indexer collects other fees related to the CBOE's proprietary VIX volatility index, which is tied to prices of S&P options.

"We have a huge advantage because of the intertwining of S&P and VIX," said DuFour. "If someone else had the exclusive [license to trade S&P options], there would be no VIX revenue for S&P."

The CBOE could continue to calculate the widely followed VIX using options on exchange-traded funds that track the index, DuFour said. The VIX also fuels fast-growing options and futures markets run by the CBOE, and the exchange company is holding talks with other exchanges on licensing the measure.

News Corp.'s (NWS) Dow Jones & Co., publisher of The Wall Street Journal and this newswire, is a minority partner in Dow Jones Indexes.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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