An End To Exclusive Licenses?

November 03, 2006

The International Securities Exchange sues to end exclusive index option licensing agreements.

Boy oh boy: the International Securities Exchange (ISE) isn't making any friends in the index industry.

After its surprising June 2006 victory in Dow Jones vs. ISE, a ruling that effectively ended index-licensing agreements for options on exchange-traded funds (ETFs), the ISE is now pushing to end exclusive licensing agreements on regular index options.

The ISE filed a complaint yesterday (Nov. 2) in the U.S. District Court for Southern New York asking the court to issue a declaratory judgment terminating the exclusive index options licensing agreements between the Chicago Board Options Exchange (CBOE), Dow Jones & Co. (Dow Jones) and McGraw-Hill (parent company of Standard and Poor's). Those agreements prevent other options exchanges from trading options based on the Dow Jones Industrial Average and the S&P 500, among other indexes.  The CBOE has held these exclusive licenses for decades (since 1983 in the case of the S&P 500), but the ISE is asking the court to bring them to an end in the interests of investors everywhere.

"ISE was founded on the belief that competition among exchanges improves market efficiency and, ultimately, benefits investors," said David Krell, ISE's President and Chief Executive Officer. "We have witnessed this occurrence for equity, ETF, and certain index options since ISE announced its entry into the market eight years ago, providing the spark that ended the practice of exclusively listing options on only one exchange. As a result of ISE's leadership, the market has experienced increased liquidity, tighter spreads, and lower customer transaction fees, and we want to deliver those same benefits to investors in the remaining exclusively-listed index options."

The exchange notes that since it started operations in 1999 and the widespread multiple listing of equity options became the norm, trading volume in the options industry has tripled, rising from 507 million contracts in 1999 to over 1.5 billion contracts in 2005.  Year-to-date options volumes are up an additional 40.1 percent, and spreads and trading costs are lower than ever.

The ISE argues that similar benefits would accrue in the index options market if the exclusive licensing agreements were terminated.

Index developers, obviously, see any limit on their ability to license their indexes as a major infringement of their intellectual property rights. 

The CBOE, for its part, believes that it has invested money and time in developing the market for these index products, and doesn't want to see other exchanges "free-load" on its hard work.


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