2nd UPDATE: CME CEO Sees Migration From Swaps To Futures

The top executive of CME Group Inc. (CME) said Thursday that investors are showing signs of embracing futures trading in place of more complex swap products as stricter rules for such off-exchange derivatives loom on the horizon.

A second-quarter surge in interest-rate-futures trading at CME got a lift from anticipated regulations that will bring higher capital requirements for banks and evolving accounting standards, making the swaps market more futures-like, said Craig Donohue, chief executive.

"Those things are beginning to blur," Donohue said Thursday on a conference call discussing CME's second-quarter results.

Debt-market turbulence in the second quarter drove CME's profit to $293.7 million, or $4.38 a share, 8.5% above year-earlier levels. The festering European fiscal crisis and the end of the U.S. Federal Reserve's quantitative easing effort pressed traders to hedge risk with CME's Treasury and Eurodollar futures contracts, lifting quarterly revenues 3% to $838.3 million.

Analysts polled by Thomson Reuters expected a per-share profit of $4.17 on revenue of $821 million. CME shares recently were 2.4% higher at $285.24.

CME is building growth strategies around regulatory revamps of the $601 million over-the-counter derivatives market, being pursued in the U.S., Europe and Asia. A key component is the requirement for many such swap transactions to be routed through clearinghouses, like CME's, which guarantee trades.

Delays in formulating rules tied to the Dodd-Frank financial law in the U.S. have put off any major uptake in new clearing services CME has developed for products like credit derivatives and interest-rate swaps. The exchange company has put off hiring some new staff for such positions until the rules come into focus, according to Jamie Parisi, CME's chief financial officer, helping trim second-half costs.

New swaps rules may be finalized by year-end, according to Chief Executive Donohue, and CME is urging regulators to prioritize regulations governing the clearing of trades.

Donohue said that impending requirements for dealer banks to hold more capital on their balance sheets, aimed at making the financial system more stable, are in part behind a slowdown in trading of swaps contracts that guard against interest-rate shifts several years out. Some of that business has come to CME's futures markets, he said, which are less customizable but more transparent and easier to trade.

Donohue described a "convergence" in accounting practices that will likely see swaps treated more like simpler futures contracts, leading more investors to shift trade toward CME.

CME has eschewed the global rush toward exchange merger deals in favor of organic growth projects. Donohue said that one of these, a trading technology platform designed to power the markets of CME's Brazilian partner BM&FBovespa SA (BVMF3.BR), soon will go online and will contribute $8 million to $10 million in license fees annually.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;

jacob.bunge@dowjones.com

--John Kell contributed to this article.

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