Yesterday, leading US futures exchange operator, CME Group Inc. (CME) announced the launch of a new clearing membership platform, Financial Instruments Clearing Membership (FICM). This new platform would help reduce the trader’s cost by nearly 65% enjoying a cross-margin for the company’s interest rate futures products and US Treasury’s futures franchise, thereby outrightly challenging NYSE Euronext Inc.’s (NYX) futures operations – NYSE Liffe – in the US. The FICM is expected to be initiated by the end of March this year.

CME currently holds a 98% market share of the US futures trading with a clearing house notional value of $30 trillion. Hence, the launch of FICM is aimed at reducing the traders’ cost incurred on margin payment and augmenting the cross-selling activity within CME’s interest rate futures, while also accelerating its significant US Treasury futures trading.

However, the prime reason for the reduction in margin payments is to challenge its arch rival NYSE’s growing future trading initiatives, a sector in which CME almost enjoyed a monopoly.

While NYSE’s New York Portfolio Clearing (NYPC) is expected to be operational from late first quarter of 2011, NYSE Liffe US also expects to offer cross-margining between Eurodollar and US Treasury Futures by the end of the first quarter of 2011.

NYSE Liffe has also allied with The Depository Trust & Clearing Corporation, the New York-based post-trade services group, in order to reduce margin requirements for each asset class that is traded. Conversely, only one lower amount will be taken into consideration for offsetting risk between products.

Moreover, the last week’s merger agreement between NYSE and Deutsche Boerse, in a $10 billion deal, has further brought in skepticism over CME global derivatives trading market share. The prospective NYSE–Deutsche Boerse deal’s combined exchanges and clearing houses would generate an annual €4.0 billion ($5.5 billion) in revenues, much higher than any other exchange group.

Even the next biggest operator, CME in the US, generates €2.3 billion in revenues. Hence, a direct competitive pressure surmounts CME and to mitigate this risk, the company has launched its FICM ahead of NYSE’s initiations.

Nevertheless, through FICM, CME will now not only prove to be cost-efficient for the cash and futures trading firms but will also enjoy capital-efficiencies. CME’s FICM initiative has been tested and validated by firms such as Breakwater Trading, Endeavor Trading, Henning-Carey Proprietary Trading, and HTG Capital Partners.

Over the last few quarters, CME has been posting strong trading volumes, which has also helped in strengthening the cash flow and capital position. Hence, CME has been making earnest efforts to expand its operations and simultaneously return wealth to investors, thereby retaining market confidence. Last week, CME announced a whopping dividend hike of 22%.

Lately, the company has been seriously mulling options to expand through acquisitions and broaden its scope. The imperative also comes from the recent industry trends of inorganic expansion. CME is reported to be desperately hunting for prospective options though negating the partnership option with NASDAQ OMX Group Inc. (NDAQ) to counter bid for NYSE or even acquiring NASDAQ. However, CME could consider other operators like CBOE Holdings Inc. (CBOE), who is also seeking a buyer.

The sudden business restructuring in the stock exchange industry reflects the rapid need to respond to the changing dynamics of modern finance. These are primarily driven by the increased demand for international services and intense competition, which have led the traditional exchange companies to seek ways to attain scale and services.

However, we believe that uncertainty hovers around CME’s future course of action despite the company’s efforts to promote, expand and cross-sell its core exchange-traded business through meaningful acquisitions, a strong portfolio and its prominent global presence will generate decent growth in the long run.

 
CBOE HOLDINGS (CBOE): Free Stock Analysis Report
 
CME GROUP INC (CME): Free Stock Analysis Report
 
NASDAQ OMX GRP (NDAQ): Free Stock Analysis Report
 
NYSE EURONEXT (NYX): Free Stock Analysis Report
 
Zacks Investment Research