Exchange operator CME Group Inc. (Nasdaq:CME) is opening a hot new table in the global financial casino, pushed to set up a derivatives exchange in London by clients who can't be bothered to comply with U.S. law.
The move by CME, one of the world's premier exchange operators -- formed several years back with the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade -- was made public Monday after the company confirmed it had asked U.K. authorities for a license to run an exchange in that country. The company said it expects the new venue to launch in mid-2013.
European financiers can already buy and sell futures and options on commodities, interest rate contracts and currencies in the London-based LIFFE market, run by NYSE Euronext (NYSE:NYX) or the Deutsche Börse's Eurex trading platform. But many choose not to participate in market-clearing transactions at all, instead buying and selling the financial instruments through small private venues or in bilateral transactions.
Upcoming European Union and U.S. regulations will push many of those transactions out into the open market, something traders fear will lead to the loss of some profit they can get from taking advantage of the currently opaque, disjointed market structure.
But the changes are coming, and market participants are looking for the best way to make lemonade out of lemons.
Enter the CME. The company, whose U.S.-based market dwarfs the size of its three largest competitors combined, said Monday it was opening up the new exchange, essentially, to allow clients a tool of regulatory arbitrage. Even after new rules are implemented, London's notoriously fangless financial regulators are widely seen as likely to have less power to interfere with traders than their peers in New York, Chicago or Frankfurt.
Monday, Derek Samman, managing director of CME Group's global interest rate and FX business, made it crystal clear to industry specialist newspaper Financial News, noting CME believed "clients should not have to choose to trade with us in the US regulatory environment, or not to trade with us at all. That is not a real choice."
It's a pattern for CME. In June, according to Financial News, the company's chief executive had told a technology conference that clients had raised concerns that they would actually have to comply with new rules set up by the implementation of the Dodd-Frank financial regulation law if they traded within U.S. markets.
"The question that many of our clients ask is if they are going to get 'Dodd-Franked'," CEO Gill Phupinder said.
In its official statement Monday, CME said it was being driven by a desire "to meet the growing regional demand from our customers." Unsaid what was customers are actually demanding: a way to sidestep the law.