CME Group Inc. (CME:US), owner of the world’s biggest futures exchange, plans a derivatives market in London by the middle of 2013, setting up in competition with Eurex and Liffe, the largest venues.
CME will start with currency futures for all of the G-7 nations, Phupinder Gill, the company’s chief executive officer said in an interview today. The new exchange, to be called CME Europe, will be led by Robert Ray as chief executive officer. CME Globex will be the electronic trading system for the new London exchange and CME Clearing Europe will process the transactions. Chicago-based CME plans to file with the U.K. securities regulator this week as the first step in the process.
Ten years after going public, CME Group has become the most valuable exchange operator in the world, capitalizing on the higher profitability of derivatives while the value of equity trading has declined. The company controls 98 percent of the U.S. futures market and gets more than 20 percent of its business outside U.S. trading hours. It opened a London-based clearinghouse, CME Clearing Europe, last year.
“CME is looking to expand globally at a time when the over-the-counter derivatives markets are seeing considerable reform” via new U.S. and European regulations, Richard Perrott, exchange analyst at Berenberg Bank, said today. “Expanding into Europe ahead of these changes makes sense given that close to half of global OTC activity occurs in London.”
The new exchange represents competition for Liffe and Eurex, whose owners, NYSE Euronext (NYX:US) and Deutsche Boerse AG (DB1), had their plan to merge blocked by European antitrust authorities in February.
CME has been working on the project for about two years. It was delayed while NYSE Euronext and Deutsche Boerse held merger talks, according to people familiar with the situation who also revealed plans for the new exchange. Regulators scrutinizing the NYSE-Deutsche Boerse deal were focused on whether sufficient competition in derivatives existed in Europe and whether CME might become “a significant player” there.
CME was also sidetracked by the bidding war for the London Metal Exchange because acquiring the venue would have given it a European exchange to build on, the people said. As CME was unsuccessful in its LME bid, it decided to forge ahead with the project, the people said.
“It’s not the regulatory environment for ourselves, but the regulatory environment for our clients,” Gill said today in an interview. “There are particular clients that are comfortable doing business in one jurisdiction,” he added.
Eurex is Europe’s largest derivatives exchange and London- based Liffe is second. Intercontinental Exchange Inc., the second-largest U.S. futures market, owns ICE Futures Europe exchange in London. Trading at ICE Futures Europe exchange set a second-quarter record.
“We have the deepest liquidity pool with about $140 billion traded a day in notional FX,” Gill said. “And we have a potential client base that don’t trade it for various reasons. We are doing it to meet their needs and we are wanted to have an initial focus.”
The exchange expects it to take about six months to gain approval from the U.K.’s Financial Services Authority, he said.
During the year it spent fighting for its deal, NYSE argued that its greatest competitor in derivatives is CME, not Deutsche Boerse. It cited an 89 percent membership overlap between CME and Liffe and rivalry in trading Euribor and Eurodollar futures. CME last year offered Euribor futures and options on its electronic trading platform, pitting itself directly against Liffe, which dominates the market for co-called short-term interest rate products.
“Would we invest in a new exchange based in Europe?” Andrew Lamb, chief executive officer of CME Clearing Europe, said in a January interview. “Yes, but based on tangible client demand.”
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