CME Seeks Further Expansion

Terry Flanagan

The Chicago derivatives exchange operator is considering expansion into the highly competitive European derivatives space, among several growth initiatives.

The owner and operator of the Chicago Mercantile Exchange, the world’s largest derivatives exchange, which has been operating a London-based derivatives clearing house since last year, has plans to open a European futures exchange, according to William Knottenbelt, CME head of operations in Europe, Africa and the Middle East.

“We would have to consider what we would do on the (exchange-traded) futures side, so we would need to have an exchange (in London)”, Knottenbelt was quoted saying.

The move to expand into Europe comes perhaps as a backup plan in the event its bid to acquire the 134-year-old London Metal Exchange falls through.

The London Metal Exchange is currently being courted by a host of potential suitors, with CME Group, NYSE Euronext, IntercontinentalExchange and Hong Kong Exchanges and Clearing on the shortlist, according to reports. All four suitors are in the process of conducting due diligence leading up to the May 7 deadline to make offers in a second round of bidding. Industry analysts have estimated the deal could be worth as much as $1.6 billion.

The LME deal was announced amid a lull in new exchange consolidation deals. The space has been quiet for several months following the failures of two high-profile hookups, with the Australian Securities Exchange-Singapore Exchange deal and the TMX Group-London Stock Exchange Group deal. Although Chi-X Europe’s acquisition by Bats Global Markets went through, it was followed by the high-profile failure of the Deutsche Borse and NYSE Euronext merger.

CME’s main rival, the IntercontinentalExchange, has operated a London energy futures exchange since 2001, through its purchase of the International Petroleum Exchange.

This would be the latest move by the CME to expand its operations domestically as well as globally. It recently bolstered its emissions trading business by acquiring environmental commodities exchange GreenX.

The CME said that acquiring the 60% equity interest that it did not own in the parent company of Green Exchange LLC would benefit customers by integrating the companies’ energy products and providing access to CME’s clearing and margin offsets.

Prior to the acquisition, GreenX was owned by a consortium of organizations including CME, Constellation Energy, Credit Suisse, Evolution Markets, Goldman Sachs, ICAP Energy, J.P. Ventures Energy Corporation, Morgan Stanley, RNK Capital, Spectron, TFS Energy, Tudor Investment Corporation and Vitol SA.

GreenX had established itself as one of the largest carbon exchanges in the world. Volumes across all contracts on GreenX grew 332% in 2011 with more than 450,000 contracts traded — equivalent to 450 million tons of CO2. For the benchmark EU Allowance (EUA) futures, the most liquid carbon futures contract, volume grew 688% from 2010 to 2011. Open interest in GreenX products has also grown significantly and currently sits close to 100,000 contracts.

The CME is also under a memorandum of understanding with the Bank of China to explore and potentially collaborate in a long-term business relationship in a move to expand both companies’ respective businesses.

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