Expanding its clearing services in Europe, yesterday
CME Group Inc.
) announced the commencement of clearing of over-the-counter
(OTC) interest rate swaps (IRS) derivative products in
London-based CME Clearing Europe.
Clearinghouses operate as central counterparties or middlemen
and guarantee every buy and sell order executed by the trading
parties. This reduces the risk in case a trader defaults.
Accordingly, CME Group initiated its OTC IRS clearing services
with the clearing of seven currencies including sterling, euro,
yen, US dollar, Canadian dollar, Australian dollar and Swiss
Thus, the company's clearing product portfolio in London
includes OTC IRS, foreign exchange (FX), credit default swap
(CDS) and commodities. Until now, the company was clearing energy
and commodity swaps through CME Clearing Europe. CME Group plans
to begin the clearing of OTC FX and the CDS products through
Goldman Sachs Group Inc.
The Royal Bank of Scotland Plc
) have already traded through CME Group's OTC IRS clearing. Going
), among others, are also likely to begin trading in the upcoming
Meanwhile, the latest expanse of product clearing in London
not only enhances CME Group's revenue growth opportunities from
international quarters of Europe but also helps gain operating
efficiencies and scale. With an achievement of clearing more than
$1.75 trillion in OTC IRS through CME Clearing US, the company
now looks forward to lead the European market.
Further, the company's foray into the OTC financial
derivatives aims to strengthen its position in the European
market, where clearing services are primarily controlled by
LCH.Clearnet, which is a leading clearinghouse for swaps in
Europe owned by multiple banks and market participants, and Eurex
of Deutsche Boerse.
Particularly, LCH.Clearnet enjoys a booming IRS business in
London, where it operates through SwapClear and holds over 95% of
the OTC IRS clearing market. However, a few competitors on the
clearing-side provide CME Group with ample expansion
opportunities through its higher capital efficient, transparent,
integrated and flexible clearing platform.
Reforms Support Extensive Clearing
The expansion into OTC IRS clearing is backed by the latest
approval received by the company from UK's Financial Services
Authority (FSA). CME Group also looks forward to capitalize on
the financial reforms in the US that strictly requires clients to
clear their swap products. While the first phase of mandatory
clearing was rolled out in the US last week, a second phase will
likely commence by mid-2013.
As a result, the Dodd-Frank regulations in the US as well as
European Union regulations have joined forces to direct the $600
trillion OTC market toward clearing all products. This
opportunity once again makes clearing service offering a
lucrative business for exchanges.
Overall, we believe that the expansion into international
avenues follows CME Group's organic growth strategy and should
boost the company's financials in the future. This is crucial in
the current scenario given that the company is facing restricted
top-line and margins' growth due to continuous low volumes and
substantially reduced clearing-transaction fees.
CME Group, Goldman Sachs, Citigroup and RBS carry a Zacks Rank
#3 (Hold). However, Morgan Stanley holds a Zacks Rank #1 (Strong
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