UPDATE: CME Group Acquires Elysian Systems In Derivatives Buildout

CME Group Inc. (CME) intensified its push into the over-the-counter derivatives market with the acquisition of Elysian Systems Ltd., a London-based provider of trading systems for the energy sector.

The Chicago-based futures exchange operator will incorporate Elysian's technology into its Clearport platform, which provides clearinghouse services for off-exchange derivatives transactions.

The deal is expected to close Thursday, CME said. Financial terms were not disclosed.

Exchange operators are targeting U.K. technology providers in a bid to capture more OTC business, amid a drive by U.S. regulators to boost transparency and limit risks by requiring more over-the-counter trades to be cleared. London is one of two leading global energy-trading centers.

CME's energy business is focused in New York, but it is expanding European operations as part of a broader effort to move resources closer to customers, and also plans to serve the fast-growing trading community in Geneva.

Geneva's energy sector has been gaining share from London in recent years because of what is seen as a more business-friendly tax and regulatory regime. The Swiss city is already a global leader in the trading of agricultural commodities.

"This is really intended to provide more flexibility for us in our energy business in terms of supporting the aggregation of quotes among inter-dealer brokers," CME Chief Executive Craig Donohue said in a presentation to investors Thursday.

An overhaul of such off-exchange derivatives trade was a key component of the Dodd-Frank Act. The law requires standardized swap products to be routed through clearinghouses and transacted on regulated platforms as part of an effort to reduce systemic risk represented by the estimated $583 trillion market.

The new regulatory landscape has raised questions around the model of CME's eight-year-old Clearport platform, which submits privately negotiated swap deals into CME's clearinghouse. Many of the hundreds of products handled by Clearport are first converted into futures contracts for the purposes of clearing, which carries tax benefits and makes posting collateral more efficient.

People involved in the discussions have said that some U.S. futures regulators raised concerns that transactions handled by Clearport generally aren't agreed upon in an open market, but negotiated privately.

Those aims could be satisfied by Thursday's deal. Elysian's Liquid Trading Platform, which facilitates electronic trading in energy and agricultural products as well as credit default swaps, will be incorporated into CME's Clearport. That integration is expected to be completed next year, and will add distribution to over 200 trading companies.

The acquisition represents CME's second venture into electronic trading of credit derivatives. In late 2008 it teamed with Chicago-based hedge fund operator Citadel LLC to develop CMDX, a platform designed to facilitate trading and clearing of credit default swaps, before abandoning the trading portion to focus on clearinghouse services.

Derivatives dealer banks--which dominate the development and trading of over-the-counter derivatives like credit default swaps--have sought to guard their territory in the business, developing their own platforms for electronic derivatives trade alongside in-house services to facilitate customers' clearing desires.

CME's credit derivatives clearing service went live in late 2009 following a series of delays, and has drawn relatively little business relative to rival IntercontinentalExchange Inc. (ICE), which has handled more than $14 trillion in notional contract value since debuting its platform in March 2009.

IntercontinentalExchange Inc. (ICE), which runs a London-based energy trading platform, in 2008 bought YellowJacket, an energy-focused off-exchange network.

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; Jacob.bunge@dowjones.com

-Doug Cameron contributed to this article.

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