Monday, July 11, 2011

CME Broadens Currency-Trading Products

CME Broadens Currency-Trading Products

Exchange Group Plans Futures on Chinese Yuan, Denominated in Dollars; Moving Beyond the Pork-Belly By JACOB BUNGE

CME Group Inc. is revamping its offering of renminbi futures, taking advantage of swelling demand for new ways to trade the Chinese currency and accelerating a push into international foreign-exchange markets.

In August, the CME will introduce new futures contracts on the Chinese currency, calculated in U.S. dollar terms, refreshing a push by the world's largest futures exchange into the world's second-largest economy. An average $21 billion in renminbi-linked derivatives was traded per day in 2010, according to the Bank for International Settlements. Nearly all of that took place off of exchanges.

Craig Donohue, chief of CME Group, above in January. 'There's a pretty big opportunity for us,' he has said.
.CME, which runs Chicago's 160-year old futures markets, is also considering new contracts and services linked to the currencies of India and Latin America.

The expanded range of contracts forms the keystone of the Chicago company's international ambitions as it tries to keep pace with rapidly consolidating rivals, moving beyond the pits trading pork bellies, wheat and corn. The shift is part of CME's efforts to parlay its history in commodities futures into a leading role in the $4 trillion-a-day currency markets.

Foreign exchange was CME's fastest-growing business in 2010 and appears to represent its best chance to win business from overseas traders.

So far, the CME is having some success. Last year, daily trading in CME currency futures for the first time surpassed the volume in its agricultural commodities business.

"There's a pretty big opportunity for us," said Craig Donohue, chief executive of CME. "FX is still a reasonably modest part of our overall business."

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.In May, CME earned an average of 85 cents per currency contract traded, making them more profitable than more-popular futures on interest rates and stock indexes, which brought in a respective 49 and 71 cents, on average. Commodity futures contracts bring in fees well over a dollar per contract. Last year, currencies made CME about $180 million in revenue.

The thinking is that as trading in currencies and related products increases and as more derivatives are directed toward exchange platforms, CME will benefit.

CME's latest push into currency trading follows a costly foray into the market a few years ago. The company was unable to gain traction with its FXMarketspace cash trading platform; the venture ultimately contributed to a $28 million writedown in 2008. Mr. Donahue acknowledged that venture was too ambitious.

This time, CME is sticking closer to its home base: the futures market.

CME is promoting its currency contracts to customers that frequent its markets in crude oil, metals and stock-index futures in a bid to become the single largest point of trade for currencies.

."Trading it at CME is in our comfort zone," said Eddie Linker, managing member of PNT Financial, a Chicago trading firm that started up in currency futures six months ago, after years of dealing in agricultural markets.

Last month, more than $134 billion per day in foreign-exchange contracts were traded through CME, putting it on par with its biggest rivals.

Icap PLC's EBS trading system is the largest, with an average $174 billion traded each day in June. Thomson Reuters reported $158 billion for its own system.

Prices of the contracts track daily fluctuations in exchange rates for the world's major currencies, and many firms now use currency futures for the same goals as spot cash transactions. Cash transactions may require a line of credit through a bank, while futures contracts don't. That, and the advent of high-speed electronic trading, have lured investors.

"People have adopted futures trading on FX for many reasons, including the security of the transaction on a centrally cleared exchange," said Greg Wood, vice president of advanced execution services for Credit Suisse. "It's additive to the whole. This is business that wouldn't necessarily have been done elsewhere due to the ease of access for clients already trading other types of futures electronically."

Foreign-exchange contracts have proven a source of strength for CME in the years since the credit crisis, which dealt a blow to its larger futures markets linked to Treasury yields and other interest rates. The exchange company has also seen fluctuating volumes in futures on benchmark stock indexes, as a result of volatility in the U.S. stock market.

Still, despite its growth, CME's market remains too small for some to transact the serious deals that characterize the interbank market in currency trading.

"Futures are still not liquid enough to do large size," said Jonathan Xiong, managing director in the global asset-allocation group of Bank of New York Mellon, which manages $240 billion on behalf of sovereign-wealth funds and pension plans. "It's not unknown for an institutional manager to do $1 billion or $2 billion worth of, say, New Zealand dollars in forward [trades], and the futures markets aren't liquid enough."

CME's growth in currency futures has ruffled some feathers, particularly among Wall Street banks.

In years past, as CME rose as a currency-dealing power, a few instructed their staff to steer clear of the Chicago markets because they represented competition to their own dealing desks, according to people familiar with the matter.

Futures contracts, which build in leverage, theoretically give customers a means to circumvent going to a bank for credit needed to trade in cash. Now, thanks to the heavy turnover created by high-frequency and professional traders, the business done at CME has become too big for anyone to ignore.

"I think the banks have woken up to the fact that our growth trajectory, at about $135 billion a day, is quite a significant amount of volume," said Roger Rutherford, CME's head of currency markets and a former executive with cash-settlement house CLS Bank.

Write to Jacob Bunge at

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