CME Clearing Aims to Compete in Europe as Trading Volume Expands, CEO Says

CME Group Inc. (CME)’s European clearinghouse this month processed more than half the volume of last year’s trades, as it steps up competition in the region.

CME Clearing Europe, which started on May 6 last year, has cleared 5,621 contracts so far in January, compared with 9,447 processed in 2011, Andrew Lamb, chief executive officer of the unit, said in an interview. The London-based clearinghouse de- registered with the U.S. Commodity Futures Trading Commission in December, making the U.K.’s Financial Services Authority its sole regulator, Lamb said.

“We can compete on equal terms here,” Lamb said. “There’s very considerable interest from clients in having a clearing arrangement that’s rooted in U.K. law. We want to present ourselves as a clearinghouse based in the U.K., operating under English law, obviously overseen by Brussels.”

CME Group, the world’s largest futures exchange, controls 98 percent of U.S. futures trading, with about 20 percent of business coming during non-U.S. trading hours. The Chicago-based company employs 170 people in London, including trading operations. It said last May that it expects the European clearinghouse, which processes over-the-counter derivatives, to break even within 12 to 18 months.

‘Future in Europe’

“London is a major office, the future is in Europe,” Felix Carabello, CME Group’s managing director of International Strategic Sales, said in an interview. “We want to be part of the community, it’s not an outpost.”

Competition in derivatives and clearing is under intense scrutiny in Europe, where antitrust regulators are next week likely to recommend against Deutsche Boerse AG (DB1)’s takeover of NYSE Euronext (NYX) because they are concerned the deal will leave one dominant operator in those areas.

The merger would create the world’s largest exchange and place more than 90 percent of the European exchange-traded derivatives market in the hands of one company. Eurex, owned by the Frankfurt-based company, is the region’s biggest derivatives venue, while NYSE Euronext’s Liffe is second largest.

The European Commission, as part of its decision making, asked whether CME Group could become “a significant player” in trading or clearing European derivatives, according to survey with more than 165 questions obtained by Bloomberg News.

Client Demand

A clearinghouse reduces the potential harm from a member firm’s default by acting as the buyer to every seller and the seller to every buyer. Most futures-exchange operators, including Deutsche Boerse, CME and ICE, own their own clearinghouse and don’t permit similar contracts traded on competing venues to be processed with their own.

“Would we invest in a new exchange based in Europe?” Lamb said. “Yes, but based on tangible client demand.”

NYSE has argued that its greatest competitor in derivatives is CME Group, 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.

Global Volume

Globally, Eurex and Liffe accounted for 39 percent of volume traded in the 10 most active exchange-listed interest rate derivatives contracts in the first half of last year, compared with 44 percent for CME Group, according to data from the Washington-based Futures Industry Association. Liffe’s Euribor futures were the fourth-most-popular contract, behind CME’s Eurodollar futures, CBOT’s 10-year Treasury note and a contract from Brazil’s BM&FBovespa SA.

Derivatives clearing in Europe is dominated by LCH.Clearnet Ltd., owner of the world’s largest interest-rate-swap clearinghouse, and IntercontinentalExchange Inc. (ICE), which processes trades in European-based credit-default swaps and energy commodities such as Brent oil futures.

CME Clearing Europe plans to offer interest-rate swaps and more commodities this year, Lamb said. While the business currently only clears over-the-counter derivatives, it could expand to exchange-traded derivatives if clients demand it, he said.

“It would be easy for us to supply competitive products provided there’s appetite for it,” Lamb said, noting that CME already has a license from the FSA.

In December, NYSE and Deutsche Boerse offered remedies to European regulators that included easing access to their clearinghouse for rivals, two people familiar with the situation said at the time.

“The issue in clearing, as in trading, is the head start and critical mass,” Lamb said. “It’s always difficult to see how a newcomer can gain traction. But users aren’t comfortable with only one clearinghouse, and with mandatory clearing coming along there needs to be a massive expansion of capacity.”

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net or @NandiniSukumar on Twitter

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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