MAKING ITS MARK.

William Knottenbelt, senior managing director for Europe, Middle East and Africa at CME outlines the European gameplan.

The CME has had a strong presence in London for many years but the momentum has gathered pace since gaining approval for CME Europe in the spring. Did you think the approval process would take so long?

We have had an established presence since 1979 but over the last few years we have built out our infrastructure in Europe, launching CME Clearing, the CME European Trade Repository and now CME Europe. The launch of the new exchange took longer than expected. The main issue was agreeing the delivery process with the regulators on how we used CLS (the global FX settlement provider owned by a consortium of banks and other financial institutions). They wanted us to use a different mechanism for delivery than we used in our US FX futures complex, and this took time to agree and bed down. We are using a paired settlement model, which is used in our treasury and equity complex but it is a new concept in FX. It requires members to settle trades through CLS agents bilaterally. This differs from the original third-party agent model the exchange currently uses for settling FX trades.

What has been the result?

Our original plan had been to launch 18 months earlier, and we had agreed timetables with participants, however the delays meant that not all original counterparties were there on day one. Once we got approval in March we quickly launched our FX futures contracts and continue to build up our client base. We have also seen average daily volumes in Europe grow from a few hundred to around 4,000 contracts by the end of August. We are not only seeing liquidity from market makers but there are other participants starting to get involved. We would like to see that climb by year-end.

What was the strategy behind creating a much stronger European organisation?

Dodd Frank and EMIR (European Market Infrastructure Regulation) have created a fundamental shift in terms of how the market has worked from a futures and OTC perspective. Historically, clearinghouses went through futures commission merchants (FCMs) to get to the customer. Now with OTC central clearing, there is no uniqueness about the OTC products so you have two to three clearinghouses offering the same service. The client has more choice and will direct the FCM to link with the clearinghouses of their choice. This has led clearinghouses to build their own sales teams to reach those end clients. For CME Group, we were not that well known outside London, Amsterdam and Geneva and while there was an understanding of who CME Group was, we were not at the front of people’s minds for OTC clearing. As a result, over the past three years, we have done a lot of groundwork and built up the relevant relationships. We now have all the building blocks and infrastructure in place – the clearinghouse, trade repository and CME Europe – to develop a strong franchise.

How does the derivatives market in Europe differ with that in the US and how does that translate into serving client needs?

We initially established our OTC clearing operation in the US and are now leveraging that infrastructure to make our European offering as similar as possible so that we look and feel the same in each location. The client requirements are different in Europe as it is not as futures oriented as in the US. If you go back even five years, futures brokers were pitching to asset managers who were not using futures. This area of the market has developed significantly but European asset managers have tended to use more OTC than futures, so we have spent a lot of time promoting our European services to the OTC market. There continues to be uncertainty about how the Commodity Futures Trading Commission (CFTC) and EMIR cross-border rules will work and so we have found that overall European asset managers, where possible, wanted to clear in Europe unless they had US-denominated accounts. We did not want to cut ourselves out of such an important market as Europe because it trades around 60% of the global FX and interest rate derivatives. Hence the reason why we launched our European OTC offering.

Can you expand on the sophisticated client management system that CME Group has developed?

We are the first clearinghouse to have received approval from the Bank of England for the full segregation client protection model with enhanced protection for all bankruptcy scenarios. This new client protection model fully segregates collateral with an external custodian at the client level and expands client asset protection beyond EMIR requirements.

What are your future plans and how do you plan to be competitive?

Overall, we plan to continue to develop the FX product offering because as I said it is not as developed in Europe and the demand is changing due to the regulations. We want to fill in the gaps in our offering for both the FX and interest rate differential (IRD) OTC markets. We are also planning to launch a suite of European natural gas futures and cocoa in the fourth quarter. We believe that the construction of these contracts will suit the market and fill a gap that currently exists. Also, we recently took part in the tender to create the London Silver price mechanism, which we won in partnership with Thomson Reuters. This service went live in August and now creates the daily silver price. We will be participating with Thompson Reuters in bidding for the platinum and palladium and the gold prices CME Group provides the electronic auction platform on which the price is now calculated, Thomson Reuters are responsible for administration and governance and the London Bullion Market Association (LBMA) accredits the price participants. The new LBMA Silver Price benchmark is published and distributed by Thomson Reuters and will be available on the LBMA’s website.

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