CME deal opens new doors

In May, Reuters and the Chicago Mercantile Exchange (CME) announced the launch of FX MarketSpace, a centrally cleared, global foreign exchange marketplace.

Chicago-based CME and London-based Reuters intend to roll out the FX MarketSpace platform late this year and early next year.

The deal greatly expands the CME’s customer base by allowing it to offer its currency futures markets to Reuters customers in a spot equivalent format (the CME prices its futures so that the prices are easily comparable to spot forex). Both parties hope this will lead to price efficiencies. Reuters’ customers, who are located in 123 countries around the world, typically trade spot forex through the interbank system. The deal will mark the first time CME forex futures are directly accessible by a significant portion of the spot forex community.

CME will provide clearing services, which will allow banks to trade with non-banks.

FX MarketSpace will “offer market solutions to capitalize on the growing demand for broader access to the FX market, the emergence of FX as an asset class, the growth of non-bank financial institutions in global FX markets, and the growth of electronic and algorithmic trading,” the companies said in a joint press release.

FX MarketSpace will offer six currencies against the U.S. dollar (the euro, Japanese yen, British pound, Swiss franc, Australian dollar, and Canadian dollar) and four cross rates euro/yen, euro/pound, euro/franc, and Aussie dollar/franc.

The deal has already gained regulatory approval in the U.S. but still needs European anti-trust clearance in addition to approval from the UK Financial Services Authority.

Electronically traded foreign exchange futures volume at the CME increased more than 150 percent in the first quarter of 2006 compared to 2005, and overall volume in forex products averages more than $20 billion in notional value per day.

Still, trading of CME’s foreign exchange contracts accounts for only about 7 percent of the total foreign exchange market, which is dominated by over-the-counter trades between banks that don’t involve a central clearing party.

The FX MarketSpace business plan requires each party to contribute capital of up to $45 million to fund the venture through to profitability. The deal is expected to become profitable during 2008, according to Rick Redding, the CME’s managing director of products and services.

“Frankly, three years ago you would not have seen a product like this out there,” he says.

The service is scheduled to start in the fourth quarter. It will initially be available in London, with other markets in Europe, Asia, and North America to follow.

“We feel that broader, credit efficient access to forex markets will fuel further growth in the market, to the advantage of both the futures and spot market,” says a CME spokesperson.