Exchange of the year: CME Group

Risk Awards 2018: Capital-conscious customers prompt bourse to refocus on US

Derek Sammann (left) and Sean Tully
Derek Sammann (left) and Sean Tully

The world’s largest exchange operator hasn’t had things all its own way of late. In April, six months after the abrupt departue of chief executive Phupinder Gill, CME Group said it would shutter its London-based exchange and clearing house. Then, in September, it announced plans to pull out of credit derivatives clearing, ceding the market to fierce rivals Ice and LCH.

Set against an industry backdrop of low volatility and struggling futures volumes, all of this might look like a retreat. Users of the exchange, though, welcome what they see as a strategic reboot.

“You could read this as CME’s management refocusing on what they do best,” says the global head of clearing at one large US bank.

But the bourse is also putting the emphasis on what market participants want. Derek Sammann, global head of commodities and options products at CME Group in Chicago, says the closure of the European business was as much an acknowledgement of reality as a realignment of strategy; market participants of all stripes trade and clear at CME because they like to have all their products – from Treasury futures to non-deliverable forwards – in one place, utilising the benefit of a single workflow and minimising their capital footprint.

The same logic holds for the bourse’s share of key markets such as equities and energy commodities, where it faces competition from Ice, he says; liquidity is increasingly pooling at only one venue – and Sammann says CME is winning the fight on key benchmarks like WTI oil and Henry Hub natural gas contracts.

“It’s becoming increasingly difficult for customers to spread their business across multiple venues in a world where capital is dear, and where regulatory capital is getting more expensive by the day. The kind of certainty and capital efficiency we can offer [from the US] across every major asset class is increasingly a draw to [global] customers,” he says.

Soaring growth from non-US users on CME’s US exchange over the past 18 months, particularly across its vast commodities complex, has helped convince the bourse it can service all-comers from its Chicago base, with its large London office repurposed as the key hub of its global sales effort. As an example, in the third quarter, the volume of non-US customers trading CME’s energy products in the US was up 65% year-on-year, says Sammann. A quarter of the bourse’s volumes come from outside the US – and almost a third of its revenues.

It’s becoming increasingly difficult for customers to spread their business across multiple venues in a world where capital is dear, and where regulatory capital is getting more expensive by the day
Derek Sammann, CME Group

A bull market for equities – US stocks are currently enjoying their lowest volatility since the 1920s, while the cboe Volatility index, which tracks the S&P 500, is jammed at multi-decade lows – usually means lower demand for CME’s benchmark equity products, with less need for market participants to hedge their exposure. But this year, the bourse has managed to buck the trend, enjoying rapid traction following its April launch of s&p 500 options with weekly Monday expiries.

The products aimed to fulfil a straightforward need, says Sean Tully, global head of financial and OTC products, offering clients another way of putting on short-term plays around events that had the potential for a spike in volatility, such as the large number of national elections in Europe this year.

“It has been a very challenging environment, yet we continue to grow our volumes. Equities in particular have been unusually challenged by low volatility. If you look at the Vix index this year, it’s running about 29% below where it was last year – but our equity options are up 7% over that time. That growth is driven by our new Monday and Wednesday weekly expiry options, which allow users much greater hedging precision around events like FOMC dates and the elections,” he says.

The bourse is also primed to benefit if there is a sharp correction in equities – something many pundits have been calling for some time, without success.

“Typically when equities prices start to fall, you see higher demand for our products. One thing that has supported the cash equities market very significantly in recent months is the potential for a lower corporate tax rate. If that doesn’t go through, there could be a repricing of the equity market,” says Tully.

One thing that has supported the cash equities market very significantly in recent months is the potential for a lower corporate tax rate
Sean Tully, CME Group

Another area clients praise is CME’s revised approach to involving members in the design of new contracts – a tactic the bourse first used on its hugely successful Ultra 10 futures. The gap in the market for the products – which mimic the economics of on-the-run 10-year Treasuries – was clear; but instead of ploughing ahead with a launch, the bourse decided to conduct a holistic review of the Treasury market, reaching out to around 100 market participants to get their viewpoint, as well as conducting numerous roadshows and educational webinars.

The bourse was rewarded with, give or take, the most successful product launch in its history, says Tully: in the third quarter of this year, average daily volumes topped 120,000 contracts a day, seeing a record of 645,000 contracts traded on November 27 – a huge success for a fixed-income future that’s only been around for roughly 18 months, and has had precious little volatility to help it.

Next in the bourse’s sights is a suite of futures on the Secured Overnight Financing Rate (SOFR), with the Ultra 10 futures launch being the blueprint. Once US market participants settled on the repo benchmark as the long-term replacement to dollar Libor, CME set about designing. As well as face-to-face meetings with scores of its key clients in the fixed-income universe, in October the bourse held a webinar for more than 700 market participants, where it solicited as many views as possible on one of three possible design specifications for the contract. The bourse expects to launch SOFR futures within a few weeks of the rate being published.

As well as planning margin offsets with its other benchmark fixed-income products, the bourse will also look to complete its offering by listing SOFR swaps for clearing.

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