CME Group (NASDAQ:CME) has applied to the UK’s Financial Services Authority (FSA) to set up a derivatives exchange in London.  CME Europe is expected to launch mid-2013. It will compete with NYSE Euronext’s (NYSE:NYX) Liffe exchange and Deutsche Boerse in the European futures market, which together account for over 90% of trading for European contracts.
Challenging the duopoly will be a tough task for CME which will look to leverage its experience in the U.S. market. Although there are no major signs of investor dissatisfaction regarding the operation of the two major exchanges, CME will hope to ride on any anti-incumbency sentiment which might rise in the market following the economic debt crisis.
Our $57 price estimate on CME Group’s stock is in-line with the current market price.
CME Europe will begin operations with a suite of foreign exchange (FX) futures and will subsequently expand its offerings by including other asset classes. The products offered initially will not compete directly with either NYSE or Deutsche Boerse’s offerings and are expected to boost CME’s global average daily volume (ADV).
Clearing is a Pot of Gold
With the European Securities and Markets Authority (ESMA) moving for greater transparency in over-the-counter (OTC) trading, (See Futures Exchanges Talk Derivatives Reforms While Europe Burns) we believe CME’s primary objective in setting up the exchange is to consolidate its CME Clearing Europe Ltd operations. The platform, launched in May 2011, will provide central counterparty (CCP) clearing services which will be mandatory to standardize OTC trading.
OTC trades account for over $700 trillion in private and unregulated trades among financial institutions. Morgan Stanley (NYSE:MS) estimates that the revenue generated from clearing operations for such trades could surpass $3 billion.  NYSE is also looking for a slice of the pie by migrating clearing services from derivatives markets in Amsterdam, Brussels, Lisbon and Paris to a Central Counterparty (CCP), NYSE Clearing. (See NYSE Heads To $34, Expands Electronic Bond Platform And Oversease)
You can gauge the impact of a change in our forecast by modifying the interactive charts above.Notes:
- CME Group Applies to Create an Exchange in the United Kingdom, 20th August, 2012 [↩]
- PREVIEW-Futures exchanges gear up for regulatory reforms, Reuters, 25th June, 2012 [↩]