CME’s Agreement With China Financial Futures Exchange Provides Significant Opportunity

October 8th, 2014 by Trefis Team
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CME Group (NASDAQ:CME) and the China Financial Futures Exchange (CFFEX) recently announced that they have signed a strategic agreement which enables the Chicago-based exchange operator to to distribute CFFEX market data outside mainland China. CFFEX is the only derivatives exchange in mainland China, and it aims to extend its global reach with this agreement. Below we take a look at CME’s prior attempts at expanding into Asia and the possible impact of the CFFEX deal on its market data division.

See our full analysis for CME Group

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CME’s early efforts to enter the European derivatives market (before it launched CME Europe) were thwarted when Hong Kong Exchanges and Securities (HKEx) announced its deal to buy the London Metal Exchange (LME) for $2.2 billion in 2012. [1] HKEx reportedly outbid CME Group, ICE Group and NYSE Euronext (now owned by ICE) for LME, in a move that helped the company diversify its offerings. This includes metal futures in China, the world’s largest consumer of industrial metals.

Keeping China as a focal point, LME recently announced the launch of  LME Clear, its new clearing house for Asian markets. [2] Additionally, competing exchange operator ICE Group expanded in Asia by acquiring the Singapore Mercantile Exchange in February to add commodity futures trading to its portfolio. Additionally, Deutsche Börse Group has expanded its operations to Asia by launching a new clearing house in Singapore and signing an agreement with the Indonesia Commodities and Exchange to develop a trading platform for the market. [3] [4]

The CME-CFFEX deal will establish CME as the middleman between the Chinese markets and a vast array of global customers that want access to these markets. [5] By our estimates, CME had a market data subscriber base of about 375,000 customers globally. At the start of the year, the company revised its annual subscription fee for access to the market data from $70 last year to $85 per customer.

Providing customers access to the expanding Chinese market with the CFFEX deal could help the company boost its customer base. Since China Financial Futures is the only derivatives exchange in mainland China, global CME customers get access to all Chinese derivatives trading-related market data. We currently the company’s subscriber base to grow to about 420,000 customers by the end of our forecast period. Taking an aggressive estimate, if the number of CME subscribers rises to over 550,000 by the end of the decade due to CME’s global expansion efforts, there would be a 4-5% upside to our $80 price estimate for CME’s stock. You can modify the interactive chart below to gauge the effect a change in subscriber base would have on our price estimate for the company.

Not only does this deal allow the company to offer more data to its existing customers, the deal with CFFEX (and future deals with other global exchanges) should help CME justify its price hikes and give it further pricing power. Market data and information services contributed $315 million to CME’s top line in 2013, while the revenue generated by this division totaled $180 million in the first two quarters of 2014 alone – 11% higher than the comparable year ago period. According to CME management, revenues were higher than the prior year period despite a slight decline in customer base owing to rise in subscription fee and elimination of waivers from March. [6] The company seems to be on course to achieve its expected revenues of over $360 million from the market data division in 2014. We estimate that CME’s market data division constitutes over 12% of CME’s total value.

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Notes:
  1. Hong Kong Exchange Wins Battle For LME, Wall Street Journal, December 2012 [↩]
  2. LME launches LME Clear, Hedge Week, September 2014 [↩]
  3. Deutsche Börse To Set Up Clearing House In Singapore, Wall Street Journal, February 2014 [↩]
  4. Deutsche Boerse Extends Asia Reach With Indonesia Agreement, Reuters, February 2014 [↩]
  5. CME Group and CFFEX Sign Market Data Agreement, Yahoo News, September 2014 [↩]
  6. CME Earnings Call Transcript Q2 2014, Seeking Alpha, July 2014 [↩]