By Michelle Price and Jacob Bunge
LONDON--CME Group Inc (CME), the world's largest exchange by
market capitalization, Monday said it's planning to launch a
London-based derivatives exchange, in a move that will see it
compete with rivals run by NYSE Euronext (NYX) and Deutsche Boerse
AG (DB1.XE).
The exchange is applying to the U.K. Financial Services
Authority for a recognised investment exchange license and will
initially begin trading foreign exchange futures products, the
company said.
Robert Ray, managing director for products and services at CME
Group, will become chief executive of the new platform, which will
operate on the CME's electronic Globex platform and clear through
CME Clearing Europe, the company's European clearing house launched
in May last year. The new exchange is expected to launch in
mid-2013.
CME Group Chief Executive Phupinder Gill said in the statement:
"Our application to establish an exchange in Europe fits within our
strategy to grow organically and is an important next step to meet
the growing regional demand from our customers."
Terry Duffy, executive chairman, CME Group, said: "We continue
to see an increase in business coming from our diverse set of
customers in Europe, with more than 20% of our volume now
originating from the region. Having an exchange in London that can
leverage the central counterparty model of CME Clearing Europe will
allow us to align ourselves even more closely with our regional
customers in both listed futures and over-the-counter markets, and
provide additional opportunities to our expanding non-U.S. customer
base."
The CME plans to replicate its U.S. currency portfolio of 56 FX
futures and 32 FX options in Europe, and expects to develop new
regional European FX products in time, Derek Sammann, managing
director of CME Group's global interest rate and FX business, told
Dow Jones Newswires in an interview.
He added: "CME is doing some $140 billion a day in notional FX
trading. However, 65% of the FX market is transacted during
European trading hours, which means there are tremendous
opportunities outside the U.S. markets. It therefore makes sense
for us to be proactive in Europe. The reality is, there us
absolutely regional demand for nuanced products."
According to a source familiar with the plans, the exchange
operator is also planning to launch some soft agricultural
commodities products, a product base the exchange believes is
under-served in Europe.
CME has worked for decades to expand overseas, but its first
stand-alone operation abroad comes as regulators on both sides of
the Atlantic finalize new rules aimed at pushing more derivatives
trading on to exchanges. The move may help the company counter a
contraction in domestic business. In recent months, CME, the
world's largest derivatives exchange operator by volume, has
suffered a sharp drop in its core business of U.S. interest-rate
derivatives.
CME's presence abroad is limited to joint ventures and the
business generated by overseas clients trading U.S. contracts.
CME is following U.S. rival IntercontinentalExchange Inc. (ICE)
into the European derivatives market. CME's move will create a
direct competitor to Deutsche Boerse and NYSE Euronext, whose
efforts to merge were blocked by European regulators on antitrust
grounds linked to their derivatives business.
Europe's market for exchange-traded derivatives is a third
smaller than that in North America, with about 5 billion futures
and options contracts changing hands in 2011, according to the
Futures Industry Association. Contracts linked to key European
interest rates and stock indexes are the region's most heavily
traded, alongside crude oil futures.
Deutsche Boerse is the largest player, handling around 2 billion
contracts last year. NYSE Euronext, whose Liffe unit trades futures
and options from London and across its continental European
markets, handled about 1.15 billion contracts. ICE's energy-centric
London market traded 269 million contracts last year. CME's
U.S.-based markets handled 3.4 billion contracts in 2011.
The world's biggest exchanges are reviewing their global
strategies after a string of failed attempts to consummate
megamergers over the past two years.
CME's move to apply for a U.K. license affirms the importance of
creating a locally-regulated entity offering regional products when
attempting to build an international presence.
However, the futures industry's recent history is littered with
failed efforts to establish overseas strongholds, notably the
abortive attempt some eight years ago by the Eurex unit of Deutsche
Boerse to challenge Chicago's dominance of U.S. interest-rate
futures.
CME's European derivatives exchange is expected to build upon a
London-based clearinghouse for privately traded derivatives
launched last year. The company already has shifted more staff and
resources to the U.K., notably basing U. K. s global
foreign-exchange trading business in the city alongside an expanded
commodities business.
In 2009, the 114-year-old CME-which has had a small presence in
London since 1979-embarked upon an aggressive push into Europe, the
Middle East and Asia. In the past four years, the company has
relocated top metals and currency positions to London, launched a
European clearing division and increased its stake in the Dubai
Mercantile Exchange to 50%.
It also inherited ownership of a freight-derivatives platform in
Norway when it acquired the New York Mercantile Exchange.
CME had been considering the creation of a European bourse for
some time, said a person familiar with its plans, but those plans
were put on ice when a bidding war erupted for the London Metal
Exchange a year ago.
Acquiring the LME would have resulted in CME obtaining a U.K.
derivatives exchange license, but the Chicago company was unwilling
to match the £1.388 billion that the Hong Kong Exchanges &
Clearing Ltd subsequently agreed to pay for the LME in June,
according to a person familiar with the situation.
"By creating a European exchange, members of the CME will be
able to trade regionally relevant contracts, denominated in local
currencies, in relevant time zones, with the potential for margin
efficiencies when clearing their contracts," a person familiar with
CME's strategy told Dow Jones last week.
CME created a UK-based legal entity for clearing in Europe after
it became apparent customers in the region were more comfortable
clearing through a locally regulated firm.
The exchange license sought by CME, under which exchanges must
operate in the U.K., is likely to be the sixth ever issued by the
FSA, and the only one issued in the past five years.