Credit risks

If the partnership works, the implication is many of the parties involved will have to relax their credit risk constraints. Banks that usually only trade with other banks would not potentially be trading directly with hedge funds and CTAs.

But the CME/Reuters stance is that while Reuters will provide easier access to the wider range of trading opportunities, the CME will offer credit intermediation.

The agreement offers a method of removing credit as an obstacle to the search for new liquidity and brings a regulated product to a market with an appetite for regulation. The CME operates a capital efficient market because it functions as a central counterparty (CCP) that assumes responsibility for trade clearing.

While some banks might not want to operate in that environment, the cost of capital usage, which will increase in the future, means any efficiency will be seized on. The market model of futures exchanges, with their central counterparties, is appealing to market participants, Sears says. The idea is, if this deal develops as it could, there’s a chance the spot FX world will adopt an exchange model and the CME and Reuters will be the two major beneficiaries.

“This is a whole new opportunity for [us] to get bank customers,” Sears says.

Reuters and the CME have worked together before in the development of the Globex platform. Additionally, rumors emerged in mid-November the CME is interesting in acquiring Instinet, Reuters stock-trading business, to broaden its trading reach beyond futures.

“Acquisitions and consolidation are an important part of CME’s growth strategy, but we do not comment on any specific aspect of that strategy,” says David Prosperi, spokesperson for the CME.