Derivatives exchange - Chicago Mercantile Exchange

Pick up the launch issue of Risk magazine, and you'll see the Chicago Mercantile Exchange (CME) prominently featured. Back then, a request to the Commodity Futures Trading Commission (CFTC) to allow it to offer after-hours electronic trading was causing a commotion in the futures exchange space. Competitors were concerned by the move and the exchange's ambitions (Risk December 1987, page 59-60). In the end, the CFTC approved the CME's request, enabling the bourse to continue on its path to become one of the world's most pre-eminent exchanges.

From its humble beginning as the Chicago Butter and Egg Board, the 109-year old exchange is now one of the most diversified exchanges in the world, offering futures and options on interest rates, equities, foreign exchange, livestock commodities, agricultural commodities, energy and alternative investments. In May 2006, it entered a 50:50 joint venture with Reuters to create FxMarketSpace, the first electronic trading network to trade spot currencies through a central clearing system. The CME also owns SwapStream, an over-the-counter interest rate platform.

Overall volumes on the CME have shown marked growth. From January 2005 to May 2007, average daily volumes for commodities and alternative investment products increased from 1,082,163 futures and options contracts traded to 1,775,557 contracts. Currency volumes doubled from 5,769,271 contracts to 10,605,433 contracts over the same period, while equity and index products showed similar growth, jumping from 28,056,398 contracts to 45,968,652 contracts. Interest rate volumes leapt from 40,404,588 contracts to 78,147,232 contracts.

The exchange has also had a long history of innovation. From 1999-2006, it launched 130 new products, including weather futures listed in September 1999, agency note derivatives listed in March 2000, derivatives on the Polish zloty in July 2004 and options on inflation in June 2006.

Arguably one of the most important products the exchange has ever created is the Eurodollar future, launched in December 1981. "The introduction of the futures markets, and the Eurodollar contract in particular, allowed both hedgers and speculators to increase or reduce their risk profile as long as 10 years out into the future," comments Simeon Schwartz, global head of fixed income and structured products for money markets, currencies and commodities at UBS in Stamford, Connecticut.

"The cost of capital projects could be estimated based on the market's forward cost of capital. So, for the first time, market participants could define with a great deal of certainty what future rates would look like and decide if the cost of capital made their investments, both on the asset and liability side, economical," he adds.

The CME has also built one of the world's most robust electronic platforms, Globex. Launched in June 1992, it was the first global screen-based futures trading platform. From 2004 to 2007, orders skyrocketed by a factor of 24, from about 50 million to 1.18 billion, while the average round trip time of trades dropped from an average of 140 milliseconds to 35 milliseconds.

The CME still nurtures the very same desire to become the cornerstone of global risk management. And its recent overture to the Chicago Board of Trade (CBOT) on a possible merger is the latest case in point.

THE CONTENDERS
- Chicago Board of Trade
- Chicago Board Options Exchange
- Chicago Mercantile Exchange
- Eurex
- Euronext.Liffe
- International Securities Exchange