Board of Trade Clearing Corp.'s E-Commerce Initiative

READER ROI

* Learn how almost going out of business sparked an organization’s IT renaissance

* Explore how changes in the global financial industry affected one long-standing player

* See why a B2B exchange would look to partner with an existing clearinghouse

The Chicago Tribune headline was ominous: "Clearing Corp. Clears Its Decks for Looming Demise," the business page screamed on July 14, 1998. At that moment, the Board of Trade Clearing Corp., the back-office operation that had cleared transactions for the Chicago Board of Trade futures markets for 73 years, seemed as good as dead. And there was little Tom Hammond or Brett Paulson could do about it. n The reasons were simple. After more than six years of talks, the Chicago Board of Trade was finally getting serious about merging the Clearing Corp., where Hammond was the number-two business executive and Paulson the CIO, with a similar organization at the nearby Chicago Mercantile Exchange. The merger would cut costs because the Clearing Corp. and the Mercantile Exchange’s clearing organization served the same function. Plans called for the liquidation of the Clearing Corp. in favor of a new, independent organization using the Clearing 21 system the Mercantile Exchange was developing. That made the Clearing Corp.--already the subject of critical reviews for allegedly inflexible and outdated information systems--redundant.

The Clearing Corp. operates separately from the Chicago Board of Trade in a setup designed to protect traders and the integrity of the market. Yet the Board of Trade was, until recently, the Clearing Corp.’s only customer, and it’s the 93 member companies conducting business at the Board of Trade that fund and govern the Clearing Corp. (Other clearinghouses are subsidiaries owned by the exchanges they serve.) This all meant, in 1998, that executives at the Clearing Corp. would learn their fate from the Board of Trade leaders conducting merger talks with the Chicago Mercantile Exchange. That word came in September 1998 when the merger talks unexpectedly died. The Board of Trade nixed the deal after the Chicago Mercantile Exchange announced an alliance with Cantor Fitzgerald, a New York City-based electronic exchange that intended to compete with the Board of Trade. At the offices of the Clearing Corp., Hammond and Paulson and their staff set about turning what had been a "looming demise" into an opportunity. They had survived, but a struggle to redefine their organization had just begun. And it would be two years, until fall 2000, before they could roll out their plan to strengthen their position in Chicago and set the stage for new sources of revenue with a B2B e-commerce play.

Newspaper headlines signal snapshots in time; they can also be a call to action. In August 1997, one year before the "clear the decks" bulletin, the Tribune carried another article spelling out the findings of a report from Andersen Consulting (now called Accenture). According to the newspaper, this report charged that the Clearing Corp. "can’t meet the strategic needs of the exchange [at the Chicago Board of Trade] because of inflexible systems" and that "its technical plans are ill-defined."

"We kind of swallowed hard and took that one," Paulson says of the media report. Paulson says he feels the coverage was harsh, but acknowledges it carried some truth. The evaluation cited above came during the long merger negotiations between the two Chicago institutions when, Paulson says, the Clearing Corp.’s leadership felt its hands were tied. It wasn’t time to pump IT investments into an organization that was facing extinction. At the same time, though, the world around them was changing.

The signs were all around. The Chicago Mercantile Exchange’s Clearing 21 system, under development, had given that body an upper hand in merger talks with the Board of Trade. Entire exchanges in London and Paris had gone electronic, and electronic exchanges like Cantor Fitzgerald were popping up to compete with the Board of Trade. Member companies, meanwhile, wanted real-time information and access to back-end systems that the Clearing Corp. could not provide. They also wanted the Clearing Corp. to adopt more flexible systems that would ease communication between the clearinghouse and its members. The Clearing Corp.’s systems used a form of batch processing, instead of real-time processing, that slowed the process of accepting and recording trades at member companies. "The systems and tools they had were very adequate and met requirements," says Bernard Dan, CEO of Cargill Investor Services in Chicago. "What we as users saw was that historic approach [to IT] was not going to be a recipe for success in the future."

Hammond, the executive vice president for clearing services, and Paulson say they recognized the need to modernize their operation and decided not only to rectify their problems, but to set out in a new direction. They began an overhaul using money from the IT operating budget that would not only bring the Clearing Corp. to the technological forefront of its field but would, for the first time, offer its services to customers outside the Board of Trade--specifically, B2B exchange websites. After doing one activity for the same customer since 1925, the Clearing Corp. would branch out into the dotcom world, like a 75-year-old startup.

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