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London calling

20 August 2012 By Quentin Webb

CME is making a timely push in Europe. The big U.S. operator of futures exchanges is preparing to run its own London derivatives market, beginning in mid-2013 with currency futures. Starting with foreign exchange avoids a head-on clash with Deutsche Boerse and NYSE Euronext, the Chicago group’s biggest global rivals. The timing is canny, too, since more currency trading is likely to shift to exchanges. An earlier move, meanwhile, could have helped DB and NYSE’s abortive merger win regulatory approval.

U.S. and European regulators are concerned about risks brewing in poorly lit corners of finance. In response, they want derivatives that have been traded “over-the-counter” to become standardised, exchange-traded instruments. Or at the very least the watchdogs want central clearing.

CME’s beachhead will be relatively inexpensive to set up. The U.S. company will not say exactly how much it will cost: but existing technology will be pressed into service, and since CME already has a European clearing operation, it will not be starting from cold.

In currency markets, exchange-traded derivatives accounted for just 4 percent of global turnover in 2010, the Bank for International Settlements reckons. But in a market with daily turnover of some $4 trillion, even a smallish shift could bring lots of new business to exchange operators. Tougher rules on capital should reinforce the trend. And London is the world’s forex capital.

It will be harder for CME to make meaningful inroads into core markets such as European interest rates. Deutsche Boerse’s Eurex arm dominates Bund futures, while NYSE’s Liffe reigns in shorter-dated Euribor futures. Alas for upstarts, users find spreading business across different platforms costly, because derivatives contracts run for years and require lots of collateral. So breaking a market leader’s stranglehold over a particular suite of derivatives can be tricky.

Still, CME was smart not to show its hand sooner. Six months ago, Brussels torpedoed a union of DB and NYSE amid concern that it would create a “near-monopoly in European financial derivatives”. Had it been known that CME was preparing its own European derivatives exchange, it might have been harder for the EU regulators to stop the other two getting together.


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