The CME Group extended its reach into the Southern and Eastern Hemispheres, entering a non-binding equity swap agreement with the Brazilian Mercantile & Futures Exchange (BM&F), and by agreeing to list futures on the Korean Kospi 200 stock index.
“CME Group is continuing to aggressively execute our global growth strategy in important emerging markets. Today’s announcement positions CME Group as the first global exchange to tap into the fast-growing Brazilian and Latin American markets,” says Craig Donohue, CME Group CEO.
CME Group offered a 2% equity stake in exchange for 10% of the BM&F, upon the completion of BM&F’s initial public offering, which is expected this year. BM&F would connect its distribution network to the CME Group, and the deal will be exclusive to BM&F in the region and to the CME Group in the United States and China. In addition, BM&F is to become a super-clearing member of the CME, offering services to BM&F market participants. CME Group will offer collateral management services to the BM&F clearinghouses for collateral not denominated in Brazilian reais.
If the deal is approved, it will be the second “super-clearing” agreement that the CME has entered, the first being a proposed agreement with the China Foreign Exchange Trade System and National Interbank Funding Center (CFETS) to clear for customers trading foreign currency and interest rate futures transactions at the CME Group from China. CFETS is an affiliate of the People’s Bank of China, operating an electronic trading system for Interbank forex, Renminbi lending and the Chinese bond market. Under the Commodity Exchange Act, CFETS would be required to be a registered futures commission merchant. The CME Group has petitioned the Commodity Futures Trading Commission for an exemption on behalf of CFETS, offering that CFETS would be required to meet certain financial requirements, along with monthly reporting and record keeping requirements and equivalent large trader reporting, a position to which the Futures Industry Association (FIA) objects.
“We all know the Chinese have a lot of money, but there is no compelling reason why the Chinese bank needs to create an affiliate that isn’t capitalized to access the [CME] when there are many opportunities to access the [CME] through a variety of firms that are already over there,” says John Damgard, president of the FIA. “We remain open to the idea that this is a good step, but so far we are not persuaded that it is,” he says, adding that U.S. firms are required to abide by the customs and the laws of other countries. “Nobody is making exceptions for us and certainly not in China. The question really is, ‘why are we doing this?’ and in the information made available to us, we didn’t see any compelling reasons.”
In a separate extension into Asia, the CME Group and the Korea Exchange (KRX) agreed to list futures on the Kospi 200 stock index on the CME’s Globex electronic trading platform. “The addition of the Korea Exchange’s Kospi 200 contract onto CME Globex will be an important part of our continued global expansion,” said Terry Duffy, CME Group executive chairman. “The addition of the KOSPI 200 futures will offer yet another key market to our electronic trading customers worldwide.”
Kospi 200 futures have traded more than 32 million contracts year-to-date through August and the underlying index is the basis for Kospi 200 options, which has the most volume of any derivatives contract in the world. Donohue says that while there is nothing preventing the two exchanges from additional listings. “We are focusing on the agreement reached on futures,” he says.
The agreement will allow for the global distribution of Kospi futures on Globex, though U.S. customers trading within the United States will not be able to access the contract until a no-action letter from the CFTC, which is pending, is granted. KRX Chairman and CEO Young-Tak Lee says that there is still work to be done by the Korean regulators, but hopes to get the no-action designation by the end of the year. Donohue added that he hopes the agreement would help move the regulatory process along.