CME to Clear OTC Derivatives – Analyst Blog

With the best-in-class clearing house for futures contracts in the exchange space, CME Group Inc. (CME) now gears up to start clearing over-the-counter (OTC) interest-rate contracts in 2010, according to Reuters on Wednesday.

 

CME is expected to launch the OTC interest-rate contract by the end of 2010 in accordance with the requirements of the sweeping financial regulatory reform bill, which was passed by the US House of Representatives on June 30, 2010.

 

According to the bill, the US House will institute new regulations on OTC derivatives and would push them through third party clearing houses and onto exchanges or electronic trading systems. The bill would necessitate trading and clearing of the OTC derivatives, which are currently traded away from regulated exchanges.

 

The officials at CME stated that a group of large buy-side accounts and dealer firms are working together to start the clearing house for OTC interest-rate contracts. However, the completion of the work might take time as it is moving at a slow pace.

 

Moreover, there is no clarity from the regulatory side. The currency clearing is not mandatory as per the bill, but is left to the judgment of the US Treasury Department. This might hinder the execution of the work for OTC contracts.

 

CME is on track to take advantage of the new requirements like its peer, IntercontinentalExchange Inc. (ICE) and several other clearing houses and expects to build up its structure internally by the end of the third quarter.

 

CME Group’s clearing and transaction services have generated revenues which amount to 97.2% of CME Group’s net revenue in 2009. Moreover, increase in the average rate per contract as well as incremental volume generated from NYMEX products and CME ClearPort services continues to drive growth.

 

We believe that CME has earnings growth potential in the long term based on a swollen derivative volume, which they believe will continue to be driven by a combination of globalization and development of new markets, increased sophistication of market participants, product innovation and increased demand for risk management.