UPDATE: NYSE-Deutsche Deal Won't Alter US Futures Landscape

CME Group Inc. (CME) remains confident on its home turf as it confronts a potentially larger competitor in the combined European derivatives businesses of NYSE Euronext (NYX) and Deutsche Boerse AG (DB1.XE), a senior CME executive said Tuesday.

CME, the world's largest futures exchange operator by contract volume, stands to lose that title to a combined NYSE-Deutsche Boerse that would hold sway over nearly all of European futures and options linked to key interest rates and stock indexes.

"Putting together their pools of liquidity doesn't really create significant competitive advantages for them," said Jamie Parisi, chief financial officer for the Chicago-based exchange company, at an event hosted by Raymond James.

The NYSE Euronext-Deutsche Boerse deal, announced last month, would create an entity that traded a combined 3.12 billion European derivatives contracts in 2010, according to figures from the Futures Industry Association. CME's total was about 3.08 billion, with most of its business centered around U.S. trading hours.

A fusion of the biggest U.K. and German derivatives platforms would mirror CME's 2007 deal to acquire the Chicago Board of Trade, which brought together dominant slates of U.S. interest-rate, stock-index and commodity futures markets.

That arrangement improved trading efficiencies for customers, according to Parisi. Deutsche Boerse's deal with NYSE Euronext will likely do the same, "but in the end I don't think it really [improves] their competitive position in selling into the U.S.," he said.

The proposed merger comes as CME faces the most serious challenge in years to its core interest-rate futures business from NYSE Euronext, which has joined up with the Depository Trust & Clearing Corp. to develop a new clearinghouse to back the strategy. Over the past decade CME has successfully defended its U.S. turf against an attempted incursion from Deutsche Boerse's derivatives arm Eurex, alongside past efforts by NYSE Euronext's U.K. futures arm to replicate key products.

The new NYSE-backed threat is centered on a cheaper way to manage futures trading alongside related business in U.S. government securities like Treasury bonds. The venture prompted CME last week to respond with its own plan to reduce collateral requirements, which drew concerns from credit rating agency Standard & Poor's.

CME also faces tougher competition from the as-yet unnamed NYSE-Deutsche Boerse group in the race to forge ties with developing exchange groups around the globe. Duncan Niederauer, the chief executive of NYSE Euronext who will also lead the combined entity, said he aims to make the new company the preferred partner of exchanges in regions like Asia.

Parisi said Tuesday that CME will continue to seek alliances with local exchanges in developing economies as its chief mode of global expansion, as opposed to making outright acquisitions, which can be complicated by local regulations.

"Oftentimes the exchanges are a crown jewel of those economies and they're not likely to be sold to an outside party," he said.

The Indonesia Commodity & Derivatives Exchange on Tuesday voiced interest in opening access to CME's electronic markets, following a new law allowing the exchange to facilitate local companies' transactions on overseas markets.

Separately, CME is working to develop activity in its dollar-based crude palm oil futures by recruiting more traders during Asian business hours, following on a 2009 deal that saw the company take a 25% stake in Bursa Malaysia Bhd's (1818.KU) derivatives unit.

Malaysia and Indonesia, both toiling to promote their commodities markets to investors, are the two biggest producers of palm oil and together represent an estimated 85% of global production.

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

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