CME to slash rate traders' costs to fight NYSE
CME Group Inc
The move on Monday comes the same day the U.S. Securities Exchange Commission is expected to rule on an application by NYSE's partner in its co-owned clearinghouse to offer similar margin reductions. The plan also highlights increasing competition in the rapidly consolidating global exchange industry.
NYSE earlier this month agreed to a takeover by Germany's Deutsche Boerse
It would seem that CME has added another feature to its market that will make it even more difficult for a competing fixed-income derivatives clearing house to crack into CME's safe, BMO Capital Markets analyst Michael Vinciquerra told investors in a note Monday. It's likely that the new program will be very attractive to a meaningful portion of CME's customer base.
Shares of CME closed down 0.7 percent at $311.28, while NYSE closed unchanged at $37.
CME will create a new clearing membership class that will offer margin discounts to traders of both Treasury securities and Treasury futures. The new membership category -- called Financial Instruments Clearing Membership -- will provide margin benefits of up to 65 percent between interest rate futures and Treasury securities.
The company, whose clearinghouse holds rate futures with a notional value of $30 trillion, plans to introduce the service by the end of the current quarter.
CME has been working on the margining plan for about two years, managing director Derek Sammann told Reuters.
It's a significant margin-saving opportunity, Sammann said, though he added he could not provide an estimate for the dollar value of the savings.
Sammann said that by lowering the cost of the so-called basis trade -- buying or selling Treasury futures against Treasury securities -- the plan also could boost overall volume at the CME. He could not say how many traders would be able to take advantage of the new margining system, saying only the number is bigger than a breadbasket.
CME named four trading firms -- Breakwater Trading, Endeavor Trading, Henning-Carey Proprietary Trading and HTG Capital Partners -- that have tested the offering and are working toward becoming FICM members. CME is also speaking to a number of brokers that may participate, Sammann said.
Meanwhile, the New York Stock Exchange parent expects in March to launch NYSE Liffe U.S., a rate futures market, at the same time as its partly owned New York Portfolio Clearing clearinghouse for the products.
NYPC won approval from the Commodity Futures Trading Commission last month. On Monday, the SEC is expected to rule on a cross-margining plan from NYPC's other owner, the Depository Trust & Clearing Corp, that would offer similar margin discounts.
SAME, BUT DIFFERENT
CME and NYPC will use different mechanisms to offer traders cost savings.
At NYPC, margins put up for Treasury futures and for Treasury securities will go in a single pot, allowing the clearinghouse to give traders margin reductions when positions offset each other.
Proprietary traders at CME will get similar discounts as long as they trade their Treasury cash and futures contracts at a single broker. The broker will provide CME information on the trader's cash positions, and CME will reduce the margins it takes on the futures accordingly.
As part of the new service, CME will contribute an extra $100 million to its guarantee fund, to which proprietary traders will also have to provide money.
CME's version of cross-margining will primarily benefit traders, who may use the freed up cash to do more trading, BMO's Vinciquerra said. NYPC's version will benefit dealers, he said.
An NYPC spokesman declined to comment on CME's cross-margining plan.
(Editing by Maureen Bavdek, Lisa Von Ahn and Steve Orlofsky)
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