CME Europe Nears Regulatory Approval

Terry Flanagan

CME Group is nearing the regulatory approval necessary to launch CME Europe, indicating the London-based derivatives exchange remains on track for a second-quarter start.

“I’d thought we would have a firm date now,” said CME Europe Chief Executive Robert Ray, who noted one piece of the evaluation is still being worked on by the Bank of England and Financial Conduct Authority, and CME Clearing Europe evaluations go through a different work stream. “When you are new, you have a go-slow approach,” Ray stated.

Regulatory approval would allow for selection of a launch date for the 31 foreign-exchange futures pairs CME Europe will initially list. Chicago-based CME Group filed the application for its first non-U.S. bourse in August 2012.

“We made significant changes to the suite of FX products we’ll launch with, to add value and opportunity for European market participants,” Ray told Markets Media.

Scandinavia and Eastern Europe are underserved by financial-services providers, and market participants in those regions need better currency price discovery and risk management, CME Europe research showed. The exchange’s maiden foray will be into markets that are not necessarily part of the G10, with smaller contracts and price mechanisms closer to the interbank quotes on the bid and ask, rather than from the International Monetary Market.

Metals and energy contracts may be logical additions to CME Europe’s product roster post-launch, though the exchange has not speculated on plans for additional futures and OTC products.

In preparations for launch of the FX contracts, buy-side institutions and hedge funds are working on back-end and back-office systems, with a focus on regulation, Ray said. Risk is the number one topic with questions centered on overall risk evaluation for clearing, potential defaults, and a variety of scenarios.

There is a need for clarity from all sides of the execution and clearing equation on what regulatory oversights are international versus local in scope. “Everyone is keeping their powder dry” until they know more, he said.

CME Europe plans to leverage the exchange’s global resources for Globex connections and clearing in order to become turn-key for Europe and the Asia Pacific region. “Firms globally are already hooked up to us through the Globex trading platform, and now they have access to all of our strategic partners,” Ray said. “We have a great reputation for leveraging technology into massive global routing mechanisms.”

CME Europe is a bit of a misnomer, Ray added, as the globally oriented firm has several hundred people on the ground in London, Belfast, and Sao Paulo, as a well a growing Asian presence. Equity investments, product development and licensing, order routing, marketing  and positioning within key markets are  part of the plan to expand distribution, build 24-hour liquidity, and add customers throughout Europe, Asia, and the Middle East, CME leaders have indicated.

More than 20% of CME’s overall volume comes from Europe, while some 30% of total FX volume emanates from Europe and Asia.

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