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Exchanges: CME Group launches in Europe

Plans to be trading by mid-2013; Europe a template for Asia expansion

CME Group announced last month its intention to open a derivatives exchange in London – CME Europe – subject to approval by the UK’s Financial Services Authority.

It has been no secret that CME has been looking to increase its presence in Europe. Already 20% of the group’s volumes come from the region and it had made a bid for the London Metal Exchange earlier this year, which was rejected.

CME Group executive chairman and president Terry Duffy says it is "not a big surprise" for the group to expand into Europe. "We have been global for many years and have been putting the pieces in place, so this is just the natural step for us now that the timing is right."

Indeed, the move is part of a long line of expansions the group has taken globally during the past few years. Elsewhere, it has been building commercial tie-ups and acquiring stakes in exchanges.

The CME Group and Brazil’s BM&FBovespa hold 5% stakes in each other, and have launched a joint electronic trading platform. The CME Group also has a 25% stake in Malaysian derivatives exchange Bursa Malaysia, a 2% stake in Mexico’s stock exchange Bolsa Mexicana de Valores, and increased its 25% stake in the Dubai Mercantile Exchange this February to 50%.

The group has commercial linkages with the South African exchange, the Korea exchange and India’s national stock exchange. CME Europe, however, is the group’s first foray alone.

Jigsaw pieces

It will benefit from having a clearing house in the region. In May last year, the CME Group began clearing through CME Clearing Europe and there are plans to become a full-service clearing house in the region. More than 120 of the group’s 2,500 employees are based in Europe.

Local clearing services make it easier for those who trade through UK futures commission merchants – such as brokerages – and Duffy says this part of the jigsaw is going to be key for all bourses.

CME Group executive chairman and president Terry Duffy
CME Group executive chairman and president Terry Duffy

"More and more people who trade over the counter are looking to listed markets for transparency and central clearing," he says. "It’s a huge benefit to have both, and those that have not participated in central clearing are trying to figure out what that means." Indeed, CME’s clearing system will be an advantage to the firm. Regulators in Europe are looking to overhaul the region’s derivatives business aiming at the OTC derivatives market. One aim of policymakers is to push towards a transparent and cleared market.

Being global is also key for the world’s bourses, according to Duffy. "You need to be global in nature or else you will be relegated to a niche player," he says. "That goes for breadth of product as well. Clients want exposure to asset classes that take advantage of the correlation or lack thereof among interest rates globally. But we will only grow globally in a way that makes sense."

Duffy says that the model in Europe is likely to be replicated in Asia.

Starting up in Europe will not be easy for CME. It will be going up against incumbents NYSE and Deutsche Börse. NYSE’s Liffe and Deutsche Börse’s Eurex have more than 90% of the total world trading in some European contracts, although reports say CME will not be competing directly. Rather it will focus on foreign exchange derivatives, where it is a leader, and look to other asset classes down the line.

Duffy says he is aware of the challenges and that the group is optimistic yet cautious. Certainly, eyebrows have been raised at expanding into a region that is facing an economic crisis. However, Duffy says the timing is right: "I’m a firm believer in making moves while others are not looking to do so. And some views are bullish on Europe right now."

Yes, the incumbents will be a challenge for CME in Europe, he adds. "Secondly, our world is smaller than the securities world, so there is a limited number of products clients can trade with us," he says. "We have to therefore add value to the European clientele."

Analysts say the move will help to boost CME Group’s profits and ensure it stays ahead of the competition. Margins have been shrinking at bourses, and CME’s flagship West Texas Intermediate oil contract has lost share to IntercontinentalExchange (ICE). In the second quarter this year, ICE’s trading volumes of its Brent contract in London surpassed CME for the first time.

CME is still waiting for approval from the London authorities, and it is expected to start operations in mid-2013. The firm has started hiring in Belfast. Robert Ray, CME’s managing director of products and services, will become chief executive of CME Europe.

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