CME Group applies to create derivatives exchange in London, UK

The Chicago Mercantile Exchange (CME), the U.S. financial derivatives exchange where weather risk and hurricanes are traded, has applied to create a London-based derivatives exchange. The CME have submitted applications to the UK’s Financial Services Authority and says that pending regulatory approval as a Recognized Investment Exchange, the new exchange CME Europe Ltd will initially begin trading foreign exchange futures products and is expected to launch mid-2013.

“We continue to see an increase in business coming from our diverse set of customers in Europe, with more than 20 percent of our volume now originating from the region,” said CME Group Executive Chairman and President Terry Duffy. “Having an exchange in London that can leverage the central counterparty model of CME Clearing Europe will allow us to align ourselves even more closely with our regional customers in both listed futures and over-the-counter markets, and provide additional opportunities to our expanding non-U.S. customer base.”

“Our application to establish an exchange in Europe fits within our strategy to grow organically and is an important next step to meet the growing regional demand from our customers,” said CME Group Chief Executive Officer Phupinder Gill. “Launching with a suite of FX products allows us to leverage our 40 years of experience in FX futures for customers in the region who access the futures market during the London business day, but we also plan to look at expanding into additional asset classes.”

The CME clearly see’s an opportunity to disrupt the status quo of existing exchanges in Europe and to position their product set more locally to European clients and traders. There are traders in Europe who currently cannot operate on the CME due to its location in the U.S. so the CME must be hoping to encourage them to come on board at a locally based exchange. Some exchange based weather trading options do exist in Europe, such as Eurex with its U.S. weather derivative contracts, but none are as extensive as the range of products available on the CME.

What’s interesting for us and our readers is the prospect that the CME could launch weather trading operations in Europe with more of a focus on the continent and perhaps on other regions such as the Middle East and Africa. The CME currently offers temperature related contracts for certain locations in Europe and frost contracts are also becoming available. However they have not expanded their snowfall or rainfall derivatives to any European locations as yet, so perhaps we could see that happen after the new exchange opened. The expansion to a European location could enable many firms who use weather derivatives but trade through brokers to move to, or at least experiment with, a direct exchange based approach to trading and hedging. A European base would also be an ideal launchpad for a suite of temperature and precipitation based derivative contracts for the Middle East and Africa, which could be popular as tools for hedging against drought.

Of course there’s no guarantee that the CME will seek to begin trading weather products in Europe at all. They plan to launch with foreign exchange products and expand beyond that over time. It could be a positive move for the European weather hedging community though and help the CME to increase their weather trading volumes.