Beginning this week,
CME Group Inc
) unveiled its point of action that it is in advanced level of
applications with UK's Financial Services Authority (FSA) to build
a derivative exchange in London - CME Europe Ltd. However, the
implementation of the plan is subject to regulatory approval.
After receiving approval as a recognized reinvestment exchange, CME
Group expects to initiate the trading of foreign exchange futures
products by the first half of 2013. The company already trades
foreign exchange futures in the US. Further, the new exchange will
be operated on the CME Group's Globex platform, while the clearing
of products will be done by CME Clearing Europe, which was launched
in May last year.
CME Group's latest plan to launch derivatives platform in the UK
also elucidates its strategic move to attain a competitive edge in
Europe, where derivative giants including
NYSE Euronext Inc.
) and Deutsche Boerse AG share the majority of the market share.
The move toward Europe also aligns with the company's long-term
growth strategy to expand organically, rather than through
acquisitions, in order to tap the global market demand.
Over the past several quarters, CME Group is also witnessing
augmented growth in Europe, currently generating more than 20% of
its volumes from the continent. Meanwhile, the ongoing global
regulations to make the derivative trading more secure and
transparent following the financial downturn of 2008, have
increased the company's scope for further expansion.
However, this is not the first attempt by CME Group to expand in
UK. In May this year, the company lost a year-long battle to
acquire London Metals Exchange. CME Group has been mulling over the
launch of CME Europe for about two years now, but the then proposed
NYSE-Deutsche merger, which was terminated in February this year,
raised concerns for the regulators. The company also strengthened
positions in Dubai and Brazil in the past couple of years.
Given the regulatory challenges posed in the US that recommends a
horizontal business model, more exchange giants are expanding their
derivative index in the Europe. In June of this year,
NASDAQ OMX Group Inc.
) announced its plan to build a new interest rate derivative
trading platform - NASDAQ NLX - in London. The trading platform is
scheduled to debut by the first quarter of 2013 although the launch
is subject to regulatory approval from the FSA.
Overall, we believe that the establishment of a new derivative
exchange in London will help CME Group expand its client base and
volumes, which would further enhance the company's operating
efficiencies and margins. This is also crucial for the exchange
giant, since volumes have deteriorated over the past few quarters
given the low rate environment, adverse exchange rate fluctuations,
regulatory challenges and market volatility.
Nevertheless, expenses related to the cost of launching the
exchange in London is expected to weigh on the financials of the
company. Additionally, competitive pressure from already
well-positioned NYSE and Deutsche Boerse will be an upcoming
challenge that the company has to deal with. Hence, we maintain an
unbiased outlook on the proposition, and await further developments
to gain more clarity on the outcome.
CME Group carries a Zacks Rank #3 that implies a short-term Hold
rating, while the long-term recommendation stands at Neutral.
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