CME Group Inc., the world’s largest futures exchange operator, has unveiled plans for a European derivatives market in a move that will pitch it into battle with Liffe and Eurex, the continent’s biggest derivatives trading bourses.
The group, which dominates U.S. futures trading through the Chicago Mercantile Exchange, will file an application with British regulators in coming days for a London-based bourse that would operate with its own management team.
CME’s decision to launch an exchange in London will strengthen the city’s role as a financial centre. Rivals NYSE Euronext, through its Liffe derivatives unit, IntercontinentalExchange Inc. (ICE), and Nasdaq OMX have all made the British capital the headquarters for their European derivatives businesses. Frankfurt-based Eurex is owned by Deutsche Boerse.
CME’s decision also illustrates how expansion in Europe has become a priority for CME as exchanges look to grab emerging business in global derivatives trading and clearing.
Group of 20 regulations such as the U.S. Dodd-Frank Act have mandated that more of the vast over-the-counter derivatives market be moved on to exchanges, and processed through clearing houses. Clearing houses stand between two parties in a trade, ensuring a deal is completed in the event of a default.
The CME dominates U.S. derivatives trading and takes 80 per cent of its revenues from North America. It has become increasingly constrained by regulators, however, and over the past 18 months has expanded significantly its London-based staff. Employee numbers have doubled in three years to more than 150 as it opened a clearing house.
A successful application would be only the sixth Recognized Investment Exchange licence granted by the U.K. Financial Services Authority.
The CME intends to begin trading by mid-2013 with foreign exchange futures but will expand into other products. The business, to be called CME Europe, will be headed by Robert Ray, currently managing director, products and services, at CME. It will also use CME’s electronic trading platform Globex, and CME Clearing Europe for clearing.
Phupinder Gill, chief executive officer of CME, said: “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.”
The decision to open its own derivatives exchange follows CME’s failed bid to buy the London Metal Exchange this year. It faces a battle in its new target market, however. Liffe and Eurex account for virtually all of trading in derivatives in Europe. Their parent companies unsuccessfully tried to argue to European antitrust authorities that CME was their main competitor when they tried to merge earlier this year. Officials blocked the merger in February.
Liffe also competes with the CME for customers wanting to trade dollar-denominated futures products at the short end of the yield curve.
Nasdaq OMX announced plans in June for a European derivatives trading business while NYSE Euronext said in March it would expand its Liffe business following the failure of its merger with Deutsche Boerse. ICE Futures Europe is strong in the trading of commodity and emissions futures, such as the Brent oil contract.