More Details On the CME Group’s Proposed London Exchange

The CME Group announced earlier this week that is has filed with the FSA to create a London based derivatives exchange in mid-2013. For the CME Group, the news marked a deviation from the company’s usual method of expansion which has been based on partnering with local exchanges and co-marketing new derivative products (an example of this is the CME Group’s partnership with Bursa Malaysia for clearing Palm Oil contracts that we referred to in our Malaysian FX update last month). The new exchange will be regulated under the FSA in the UK and trading will be operated electronically through the CME’s Globex platform. Also, while there are plans of offering trading of various asset classes in the proposed London exchange, the CME will specifically be focusing on the launch of its FX products in London.

Explaining the rationale behind the proposed London exchange, Derek Sammann, Global Head of Interest Rates and FX products, told Forex Magnates that the launch of a London exchange was based on the growth of FX trading originating from Europe. “CME’s current non-US business only accounts for 30-35% of our FX volumes, so customer feedback confirms that we have an opportunity to reach a broader Non-US customer base”. He also explained “that there was a desire (from European firms) for an FSA regulated exchange for FX products that was consistent with UK financial laws.” When asked whether there will be any changes to margin requirements and whether there was even demand from London traders for changes, Sammann answered that the “risk management and margining will be broadly in line with CME’s US methodology. Customer firms want the known and trusted risk management principles of CME Group’s central clearing warehouse, and that prudently managing risk is the business that we are in.”

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Currently, the CME Group is planning on launching its existing FX futures products upon the launch of the London exchange. In response to whether the CME Group will create new products for the Europe, Derek Sammann answered that being in London will create a “Venue for more natural demand, (the CME Group) is really excited as this gives us the opportunity to create regional trade opportunities and we will develop new products based on customer demand.”

For FX traders, the CME has become a rising destination of trades as volumes rose 10 fold from $12 to $120 billion ADV from 2002 to 2011. According to the CME Group, the totals made the CME the second largest venue in the world in terms of FX ADV in 2011. Therefore, with volumes expected to rise due to the increase of additional traders from the London Exchange, it could boost liquidity on what is already one of the world’s most liquid FX venues.