--Futures exchange cites rising business from swap markets
--Revenues from swap-related ventures have been slow to
materialize
--Fourth-quarter earnings fall 78% to $166.8 million
(Adds CEO comments from conference call and details.)
By Jacob Bunge
CME Group Inc. (CME) said Tuesday new business is flowing toward
its exchange platforms from the huge over-the-counter derivatives
market, ahead of a March deadline set by U.S. regulators for new
trading rules.
Chief Executive Phupinder Gill said banks and asset managers are
ramping up use of CME's products and services built around swap
markets, preparing for new rules around trading and processing such
customized derivatives contracts that were introduced to reduce
systemic risk in the financial system.
"The March mandate is being taken very seriously," said Mr. Gill
on a call with analysts as CME reported a 78% drop in
fourth-quarter profit, weighed down by declining volumes in its
existing derivatives business.
Exchange operators such as CME have been seen as the chief
beneficiaries of new regulations such as those called for under the
U.S. Dodd-Frank financial law and its European counterpart. They
aim to direct more trading in OTC derivatives, such as swaps,
toward regulated facilities in an effort to boost transparency and
trim broader risks to the financial system.
The hoped-for business has been slow to materialize as
regulators have struggled to agree on definitions and detail new
trading rules. Meanwhile, exchanges have confronted a wider-ranging
slowdown in trade as investors pulled money out of stocks and banks
dialed back risk-taking following the 2008 financial crisis.
CME estimated that its clearinghouse processed $274 billion
worth of interest-rate and credit-default swap transactions in
January, roughly doubling December's total, offering one sign that
more swap traders are routing their business to clearing facilities
ahead of U.S. rules that will begin requiring some firms to clear
swap transactions by March 11.
The exchange group also claimed early uptake in new futures
contracts meant to replicate swap deals, which launched in December
and have recently seen about 6,000 contracts traded per day.
Mr. Gill told analysts Tuesday that CME remains open to
partnerships with foreign-based exchanges, an avenue the
Chicago-based market operator has favored while rivals pursued
blockbuster mergers. The latest planned combination,
IntercontinentalExchange Inc.'s (ICE) $8.2 billion takeover of NYSE
Euronext (NYX), doesn't change the competitive picture, according
to Mr. Gill, who said he saw no large deal-making opportunities for
CME.
CME on Tuesday evening reported a profit of $166.8 million, or
50 cents a share, down from $745.9 million, or $2.25 a share, a
year earlier. An average 10.2 million contracts traded per day
across CME's platforms in the fourth quarter, down 13% from the
year-earlier period.
Excluding items such as impacts related to a revaluation of
deferred-tax liabilities and increases in deferred income tax
liabilities related to S&P Dow Jones Indices, adjusted earnings
were 63 cents. Revenue decreased 10% to $660.9 million. Analysts
polled by Thomson Reuters most recently projected earnings of 63
cents on revenue of $660 million.
Class A shares were down 1.5% at $58.28 in recent after-hours
trading. Through the close, the stock is up 17% this year.
--Tess Stynes contributed to this article.
Write to Jacob Bunge at jacob.bunge@dowjones.com
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