UPDATE: CME Takes Aim At NYSE's UK Interest Rate Business

CME Group Inc. (CME) laid out plans Thursday to launch a new slate of European-flavored interest-rate contracts, escalating a battle with NYSE Euronext (NYX) over one of the world's most heavily traded derivatives markets.

The Chicago exchange company aims to launch futures and options on the Euribor, a key rate reflecting the cost of borrowing euros on the inter-bank market, in the second half of this year.

Euribor contracts are the prized product of NYSE Euronext's U.K. futures division, Liffe, and CME's push into the business follows NYSE Euronext's March launch of popular U.S. interest-rate futures long traded at CME.

"We're focused on globalizing our business and also giving our client base greater opportunities and more choice of what to trade," said Robin Ross, managing director of CME's interest-rate product line, in an interview.

CME is home to Eurodollar futures, contracts that allow banks, hedge funds and other institutions to hedge against shifts in the three-month U.S. dollar London interbank offered rate, or Libor. Libor, indicating the cost of borrowing U.S. dollars on the London interbank market, is a global benchmark for floating-rate lending.

For CME, the addition of Euribor contracts marks its biggest move yet into non-dollar denominated interest rate products. Last month CME launched futures on sovereign-yield spreads, enabling participants to hedge or speculate on differences on rates for buying debt from the U.S. and five European nations.

Sovereign yield offerings have yet to catch on with the trading community. However, Euribor futures are a "comfortable add" because people are more familiar with the underlying rate, CME's Ross said.

"This opens an exciting chapter for CME as an offensive minded competitor, following a recent period where fighting off would-be competitors in the U.S. seems to have weighed on shares, despite a (thus-far) robust defence," wrote Macquarie Securities analyst Ed Ditmire in a research note Thursday. He estimated that the contracts made $250 million to $350 million for NYSE Euronext over the last year.

CME's new emphasis on euro-denonimated products comes at a time of increased volatility in the value of the unified euro currency. Euro-zone member Greece is struggling to avoid default on its burdensome government debt, with Spain, Portugal, and Ireland also trying to close mammoth budget deficits.

Typically, elevated volatility translates into higher trading volumes.

Modeled after Eurodollars, futures on the Euribor will be listed 10 years out and on a quarterly basis. The first five years are likely to be the most heavily traded, said Ross. Traders will be able to to perform various spreads to speculate on U.S. interest rates versus rates in Europe.

The Eurodollar ranks as the world's most heavily traded fixed-income future with nearly 511 million contracts traded in 2010, according to data compiled by the Futures Industry Association. NYSE's Euribor futures market is about half the size, with 249 million contracts changing hands last year.

CME's introduction of the Euribor contract comes as NYSE Euronext's Liffe division is poised to become a more dangerous opponent. NYSE's agreed deal to merge with Deutsche Boerse AG (DBOEF, DB1.XE) would combine the short-term U.K. interest-rate contracts with German-based futures and options that reflect the long end of the interest-rate curve, creating a European version of the U.S. rates complex run by CME.

A spokesman for NYSE Euronext had no immediate comment.

Exchanges typically face long odds in wresting trade from established competitors. Liffe previously listed a version of CME's Eurodollar futures in the U.K. but found little success, while the Chicago Board of Trade -- now a unit of CME -- also failed in a past effort to replicate longer-term European rate futures offered on Deutsche Boerse's Eurex market.

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com and Howard Packowitz, Dow Jones Newswires; 312-750-4132; howard.packowitz@dowjones.com

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