Exchanges such as
CME Group Ltd.
), NYSE Euronext (
) are lined up to get a piece of OTC derivatives market as new
regulations will require that derivatives trading should go through
exchanges and be cleared through clearing houses. As this occurs,
the CME Group, the world's largest futures exchange, is set to
benefit and it plans to launch derivatives clearing house in Europe
after it received approval from UK regulators.
We have a
Trefis price estimate of $323 for CME Group
, which is about the same as the current market price.
The new regulation is a part of Dodd-Frank financial reform act,
under which the Commodity Futures Trading Commission (CFTC)
proposed rules for how over-the-counter (OTC) derivatives clearing
houses should be regulated. While these rules pertain to the US
securities laws, we believe regulation in the EU should mirror that
of the US with regard to derivatives. The new rules aims to reduce
risk when trades go through clearing houses by standing between and
guaranteeing both sides of each trade. In the present system, the
banks are still in control of the OTC derivatives trade and hold
almost 97% of the $580 trillion OTC derivatives market which
is not well regulated and not transparent.
The CFTC also proposed to limit the ownership of clearing
houses, exchanges and trading systems by banks and major
swaps dealers to 20%, which the banks are disputing as they have
economic interests in the controlling the derivatives trade.
The derivatives market will continue to grow with the growth in
technology and algorithmic trading techniques which will push trade
volume higher and more and more of this trade will go through an
exchange or at least be tracked better using clearing houses. This
should bring transparency and better risk control in the
market but a lot still depend on how the new regulations are
CME's Average Daily Trade Volume would increase
The two biggest driver of the CME's stock are the average daily
trade volume in energy contracts and interest rate contracts. As
the economy improves, we should see increased volume of traded
contracts and leading exchanges like CME should benefit.
We currently estimate that average daily trade volume of energy
contracts would increase from 1.7 million in 2010 to 2.4 million in
2013 and the average daily trade volume of interest rate contracts
would increase from 5 million in 2010 to 7.3 million in 2013.
There could be a 10% upside to our price estimate for
CME's stock if the trade volume of energy contracts and
interest rate contracts increased 20% above our
See our full estimates for CME Group here.