CME Group Joins Battle For NYSE Interest-Rate Futures Market

CME Group Inc. (CME) on Monday opened a new front in the battle for global derivatives trading, launching a futures market modeled on one of rival NYSE Euronext's (NYX) most-traded contracts.

The Chicago-based futures exchange group is mulling additional launches that could thrust it further into competition for foreign-based futures trade, according to officials, though just a handful of the newly listed contracts on a key European interest rate traded Monday.

CME dominates trading in futures linked to key U.S. rates like Treasury yields and the fed funds rate, allowing banks and hedge funds to protect against changes to their cost of borrowing money over time.

Among the company's most-traded markets is the Eurodollar, gauging anticipated shifts in the U.S. dollar London interbank offered rate, or Libor. Eurodollars in 2010 were the most heavily traded interest-rate futures worldwide, with about 511 million contracts traded, according to data from the Futures Industry Association.

CME aims to carry this momentum into so-called Euribor futures, tied to the rate banks charge one another to borrow euros on the London interbank market. Such contracts are the domain of Liffe, the London-based futures platform run by NYSE Euronext, where last year 248.5 million Euribor futures changed hands.

Though the Euribor futures market is about half the size of CME's Eurodollars, it has grown at a faster clip. From 2009 to 2010, trading volume in Euribor futures rose 28.9%, compared with a 16.8% growth rate for Eurodollar futures.

"When you start to offer interest-rate contracts in another currency, the second most important after U.S. dollars is clearly euros," said Sean Tully, managing director of interest-rate products for CME.

"After we see the success and how strong the uptake is [for Euribor futures], then we'll look at other opportunities," he said. "There's nothing we're going to rule out."

A spokesman for NYSE Euronext declined comment.

As of late afternoon Monday, three Euribor contracts had traded on CME's electronic markets. Exchange officials noted that it is not unusual for first-day trading to be quiet as firms test their systems.

CME is going on the offensive after fending off for more than a decade startup exchanges aimed at drawing away business in its U.S. rates market, which is CME's biggest revenue generator. Currently, NYSE Euronext is nurturing an effort that went live in March and ELX Futures LP, a consortium-backed exchange, has been targeting the market since July 2009.

CME's Euribor sales pitch is focused on efficiency and trading costs, and arrives as banks face stiffer capital requirements under rules being formulated by the Basel Committee on Banking Supervision, which gathers regulators from 27 countries.

Tully said that by trading Euribor contracts alongside Eurodollars at CME, firms holding positions that correspond to one another could see their required trading collateral come down by 50% to 75%.

NYSE Euronext has made that same sort of efficiency a centerpiece of its planned merger with Germany's Deutsche Boerse AG (DB1.XE, DBOEF), which offers European interest-rate contracts complimenting those traded at Liffe.

Chicago-based brokers on Monday reported little initial demand from their clients for the new CME market.

"It's going to be difficult for CME to do this," said Mark Hawkinson, rate futures and options broker for Newedge USA, citing the difficulty that rivals have faced luring business away from CME's own long-established markets. Newly launched platforms mean less trading volume, which can make it difficult for traders to open and close positions without giving up some profit.

Tully said that CME has structured incentives for market-makers to trade in the new Euribor market and fees on large-sized "block" trades will be waived through the end of 2013.

"We're watching it," said Will Hobert, managing member of WH Trading LLC, a Chicago-based proprietary trading firm. "It takes a bit of time to get your systems comfortable with the product."

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

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