IntercontinentalExchange's (
ICE
) potential acquisition of NYSE Euronext (
NYX
) grabbed the headlines at the end of 2012. Having discussed in
detail the potential effects and the
reasons for the deal
in a previous article, we will now analyze the implications the
acquisition might have on ICE's main competitor,
CME Group
(
CME
). CME will face increased competition in the growing futures
trading business, particularly in interest rate contracts trading.
To gauge the potential impact on CME's operations, let's explore
the company's business model.
See Full Analysis for CME Group Here
Comparing The Two Exchanges
CME Group is the second largest derivatives exchange in the
world in terms of trade volume behind Korea Exchange and consists
of the Chicago Mercantile Exchange, the Chicago Board of Trade and
the New York Mercantile Exchange. Transaction fees from energy and
interest rate contracts trades are the main sources of income for
the company, accounting for about one-fifth of the revenues
each.
Regulatory changes and uncertainty in the market led to low
trading volumes last year as the company reported a drop in
revenues for most of 2012. CME is expected to recover in 2013 as
new regulations requiring all over-the-counter (OTC) trades be
cleared through a central exchange will be implemented both in
Europe and the U.S. The regulations are expected to generate
revenues of about 1.2 billion per year. Analysts at UBS (
UBS
) estimate a 25% increase in revenues from OTC interest rates swaps
clearing and CME and ICE are scrambling to gear up for the revenue
opportunity.
ICE is a relatively new exchange, established in 2000 by a
consortium of energy companies and banks, and it earns most of its
revenues from transaction and clearing fees on energy contracts
trades. About 15% of its revenues are generated from transaction
fees charged on ICE Brent Crude futures and options trades. The
company has had its eye on the lucrative interest rates futures
business for some time and NYSE Liffe provides the perfect platform
for ICE, with 70% of its revenues derived from interest rates
contracts trading. ICE made a bid for NYSE's Liffe business along
with Nasdaq (
NDAQ
) in April 2011 but the deal was blocked by the U.S. Justice
Department as it would give Nasdaq a monopoly over listings in the
U.S. As Nasdaq is not involved in the transaction with NYSE this
time, the authorities might be more inclined to allow the deal.
Taking a look at trade volumes, CME currently clears/trades
about 3.5 billion contracts per year and is the second largest
exchange in the world behind Korea Exchange. It is followed by
Deutsche Boerse AG's Eurex exchange which trades around 2.8 billion
contracts per year and NYSE which trades 2.3 billion. ICE is
currently outside the top 10, trading close to 400 million
contracts per year but is mainly focused on the energy domain.
Both ICE and CME have seen high revenue growth in the five years
prior to 2012 as the futures industry has expanded following the
2008 financial crisis and both will be looking to capitalize on the
regulatory reforms in 2013. We expect an increase in energy
contracts trading volumes in the coming years.
The Battleground
NYSE Liffe primarily operates in Europe where it enjoys a near
duopoly with Deutsche Boerse AG's Eurex exchange. About one-fifth
of the world's options and futures trades are executed in Europe
which makes it a lucrative market. NYSE Liffe trades about 1.1
billion contracts per year while ICE clears/trades around 270
million. Eurex is the market leader with 2 billion contracts
traded/cleared per year.
CME has announced plans to open a derivatives exchange but will
have a tough time fighting the incumbent exchanges for market
share. ICE already operates a clearinghouse in Europe which will
give it the upper hand once regulations requiring OTC transactions
to be cleared come into play. Further, competition is expected from
Nasdaq which also plans to launch a derivatives exchange in London
in 2013. Given the competitive nature of the industry, CME might be
interested in making a bid for Deutsche Boerse's established
business instead of entering the market as a new player.
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