Swaps Clearing Boosts CME

Terry Flanagan

Derivatives-exchange operator CME Group reported a strong second quarter, with volumes and revenue bolstered by regulatory progress toward exchange-based swap clearing, as well as price swings in metals and interest rates.

Specifically, the U.S. Commodity Futures Trading Commission mandated that as of June 10, market participants including commodity pools and private funds need to clear swaps through a central entity, rather than complete the transactions on an over-the-counter basis. The milestone followed the March 11 deadline for so-called Category 1 market participants and broadened the roster of prospective exchange customers.

“Category II clients have overwhelmingly chosen CME,” said Phupinder Gill, the exchange operator’s chief executive, on an Aug. 1 earnings call.

“We’ve been consistent in our focus on clearing of swaps for margin-offset benefits and the rollout of swap futures,” Gil said. More than 300 firms that had traded OTC are clearing on CME; 29 of those — including asset managers, insurance companies, and government-sponsored enterprises — were added in July, he noted.

Chicago-based CME is working to help the buy side execute ‘swaptions’, or swap options, which had been considered un-clearable. Random price incentives will go away, and a more normalized run rate will materialize for the balance sheet. An exchange spokesperson said most billable swaps will be cleared by the middle of 2014.

CME’s open interest in the OTC interest rate swaps has grown to more than $4 trillion and CME’s market share of the total open interest in all cleared interest rate swaps trading is about 80%, according to the exchange operator.

“Category I customers are considering our solutions based on capital requirements,” said CME Chief Financial Officer Jamie Parisi. “They are moving their open interest to us for capital efficiencies,” he said, adding that providing swap futures adds to efficiencies down the road from what the London Clearing House can offer.

CME said the build-out of its energy complex across the benchmark futures of WTI, Brent and crude oil has gone well, and volumes are strong. Brisk activity in corn futures activity can be seen as barometer of how commodities can be expected to perform as the U.S. economy improves, investors were told.

CME’s Latin American and Asian business expanded 40% and 28% respectively from 2012’s second quarter. The firm’s expansion strategy remains focused on the launch of CME Europe later this year to attract business from those would not otherwise trade in the U.S., Gill said.

“Over the past five or six years, we’ve experienced growth in OTC and the core futures side,” Gill said. “Meaningful income now will be from Europe and Asia,” especially China, Taiwan, Hong Kong and Singapore, he stated.

A “huge” Chinese futures firm has joined CME as a full clearing member, and there will be “a pipeline of more Chinese (futures commission merchants) behind them,” the bourse CEO added.

One of the main overarching industry issues – harmonizing the global regulatory environment – has been big in discussions with overseas customers who are expressing concerns about their access to U.S. markets, said CME Group Executive Chairman Terry Duffy.

In response to an inquiry about the planned sale of the NYMEX property in New York’s financial district, a CME spokesperson said a transaction is expected by the end of 2013. That building is about half the size of the CBOT landmark building in Chicago which sold for $150 million, and market values in the Big Apple are a bit higher, the representative noted.

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