Here’s What The NYSE-ICE Deal Means For The CME Group

The merger of NYSE Euronext (NYSE:NYX) and the IntercontinentalExchange (NYSE:ICE) now seems imminent as it is expected to receive the green light from the E.U. antitrust regulators today. ^[1]

The merger will make the combined entity the third largest exchange in the world, only behind Hong Kong Exchanges and Clearing Limited and the CME Group (NASDAQ:CME). ^[2] The deal will also provide ICE an opportunity to expand rapidly into the European derivatives market by exploiting the capabilities of NYSE’s LIFFE platform.

This has huge implications for ICE’s arch rival, the CME Group, which is still in the process of establishing a presence in the European derivatives market. We believe that while competition in all the markets where the two players operate in is going to intensify, there is also a possibility that the CME Group will be on the lookout for a large M&A deal of its own.

See our full analysis for the CME Group

ICE Has An Edge In The European Derivatives Market

The CME Group is just entering the London-based derivatives market along with others players like NASDAQ OMX and the London Stock Exchange, and faces the task of setting up its business from the ground up. On the other hand, the IntercontinentalExchange will assume the role of the market leader immediately after its acquisition of NYSE completes in Q3 2013.

That is because the deal will add LIFFE to IntercontinentalExchange’s armory. LIFFE (short for “London International Financial Futures and Options Exchange”) is NYSE Euronext’s international derivatives business which operates derivative markets in Amsterdam, Brussels, Lisbon, Paris and London. ^[3] As mentioned above, it enjoys a virtual duopoly in the European derivatives market along with Deutsche Borse and will immediately make IntercontinentalExchange the leader of the European derivatives market. Further, LIFFE’s offerings complement IntercontinentalExchange’s clearing platform and will allow the combined entity to launch innovative contracts in multiple asset classes. This will ensure that the IntercontinentalExchange keeps flooding the market with new and innovative products in the coming years to abate competition from new entrants.

A Major Deal Involving The CME Group Could Be Likely

We have mentioned in a previous article that exchange M&A is extremely contagious. That is, the involvement of any major exchange in an M&A deal is likely to spark similar discussions among its competitors as they try to protect their market shares. We believe the same is likely to play out again in the wake of the ICE-NYSE deal.

As the world’s largest derivatives exchange, the CME Group would definitely not want to lose out to the IntercontinentalExchange in the European derivatives market and would consider all options, including a major takeover, to boost its presence. The group’s CFO, James Parisi, recently mentioned that they will not shy away from a large deal if an opportunity appears and this may be a signal of what is to come in the future.

The CME Group has been known to have approached the Deutsche Borse for merger discussions towards the end of last year, and we believe that such discussions could restart if the two companies find in the coming quarters that the ICE-NYSE combination is too strong to tackle individually. Apart from NYSE LIFFE, Deutsche Borse’ Eurex platform is the only other major player in the European derivatives market currently and could give the CME Group’s European ambitions a shot in the arm, if acquired.

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1. EU Said to Raise No Objections to ICE Takeover of NYSE Euronext, Bloomberg, June 17, 2013 [↩]
2. ICE to win EU approval for $8.2 billion NYSE bid, Reuters, June 17, 2013 [↩]
3. SEC Filings, NYSE Euronext, 2012 [↩]