UPDATE: CME To Challenge NYSE Venue In Treasurys Trade Service

CME Group Inc. (CME) announced Monday a new service for fixed-income traders, responding to an anticipated competitive threat from NYSE Euronext (NYX) expected to arrive next month.

CME aims to lower costs for investors who trade its interest-rate futures markets alongside dealings in cash Treasurys, closely resembling a planned effort from the parent of the Big Board that targets CME's core business.

At stake is CME's most heavily traded market that brought in about $175.5 million in revenues the fourth quarter, and has been positioned as a key growth area for NYSE Euronext's push into U.S. futures trading.

NYSE Euronext has teamed with the Depository Trust & Clearing Corp., processor of nearly all domestic Treasurys trade, to develop a new facility that will let investors pool collateral posted against dealings in both markets. The goal is to drive down the cost of doing business for customers and siphon trading away from CME.

That venture, called New York Portfolio Clearing, is expected to launch in March alongside a slate of interest-rate futures traded on NYSE Euronext's small U.S. futures exchange.

CME's service, also seen going live in March, has a similar goal. Customers of the Chicago-based exchange operator that do heavy business in U.S. government securities like Treasurys and repurchase agreements could see lower collateral requirements for their interest-rate futures trades if they are holding an offsetting position in related cash markets.

"It's about customer choice," said Derek Sammann, CME's managing director of interest rate and foreign-exchange products, in an interview. He said that the level of margin required of CME clients could fall up to 65% under the new service.

A spokesman for NYSE Euronext had no immediate comment.

The New York Portfolio Clearing venture, under rules still being reviewed by regulators, would let traders pool collateral against Treasurys and related fixed-income futures in a single account.

CME's service, which carries no similar agreement with the Depository Trust & Clearing Corp., will continue to see customers hold margin against outstanding futures and cash Treasurys transactions in separate accounts for each market, but with less collateral required on the CME side if positions are shown to offset one another.

Utilizing the service requires that customers operate under a clearinghouse member active both at CME and at the DTCC's Fixed Income Clearing Corp., according to Sammann. There is a "large number" of such firms, he said.

The move by CME relies upon its strength running a near monopoly on U.S. interest-rate futures trade, with $30 trillion worth of outstanding trades on its markets. Cutting the cost of holding those open trades could make it less likely that investors will gravitate toward a potentially cheaper but as-yet untested option offered by NYSE Euronext and the DTCC.

Several companies, including Breakwater Trading and Endeavor Trading, are in the process of signing on to the new service, according to CME.

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

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