DERIVATIVES REPORT: CME 68 CME Craig S. Donohue, CME CEO at the new frontier As market boundaries flounder in the wake of globalisation, stock and derivatives exchanges have oft-times struggled to redescribe their role in the new financial order. Not so the Chicago Mercantile Exchange (CME) which, since demutualisation back in 2001, has swelled in confidence, strength and reach. Armed with a $700m war chest, big could get bigger as the CME scouts for strategic acquisitions, joint ventures and growth. Chief executive officer (CEO) Craig S. Donohue talks to Francesca Carnevale, about the seemingly unstoppable force that is now the CME. JULY/AUGUST 2005 • <strong>FTSE</strong> GLOBAL MARKETS
NO SURPRISE THAT in Illinois, which now boasts an economy greater than that of Russia, testosterone-charged numbers are de rigueur at the Executives’ Club of Chicago’s early-bird monthly breakfast meetings. The sometimes biting elite of Chicagoan corporate society has gathered this day to hear Craig S. Donohue, the CME’s urbane CEO, explain why “The Future is in Futures”. In the sometimes catty table talk before his speech, more than one person pointedly remarks that the CME, which has a market capitalisation of some $7bn, is but only one of the top 25 companies in Chicago. Yet even this number-jaded clique, looks up in conceded surprise when Donohue eventually lobs his own fat statistics into the mix. Last year more than 800m contracts were traded on the exchange, with a gross value of $463trn. That is over 10 times the current annual gross domestic product (GDP) of the United States (US). Put another way, in the first two weeks of January, the CME traded more in notional value terms than the New York Stock Exchange handles in a full year. It is an indication of just how far futures and options markets have come. Today it is a global growth industry which boasts “compounded annual growth of 38% during the last three years, compared with the relatively flat growth for the world’s stock exchanges,” according to Donohue. His well-practised delivery bears fruit, even among Chicago’s uber-moneyed city fliers. “He seems to know what he is talking about,” says one of the breakfasters, if a tad grudgingly. It is a back-handed compliment that Donohue would laughingly appreciate, with the sort of gracious ease that masks years of driving hard work and a sometimes ruthless strategic focus. A 17-year veteran of the CME, he does indeed know the business very well. Still barely in his forties Donohue took over as CEO of CME Holding and the CME itself only in January 2004, but to many market watchers, he was a natural choice for the job. He succeeded James J. McNulty who stepped down after steering the CME through demutualisation, an initial public offering (IPO) and the early rise of electronic trading via the CME Globex platform. Donohue entered as a general counsel back in 1989, with a list of academic and legal qualifications almost as long as this article. He joined from the local law firm of McBride Baker & Coles where he had specialised in corporate and securities law. Steadily working through one senior management position after another, in each role Donohue played an important part in 400 350 300 250 200 150 100 50 Dec-03 <strong>FTSE</strong> GLOBAL MARKETS • JULY/AUGUST 2005 “Increasing Market Share at the Expense of the European Exchanges” – Chicago Mercantile Exchange vs. Deutsche Bourse and Euronext Mar-04 Jun-04 Chicago Mercantile Exchange Deutsche Bourse AG Euronext CME MONTHLY AVERAGE DAILY VOLUME (In Thousands) May 2005 May 2004 Percent Change CME PRODUCT LINE Interest Rates 2,385 1,878 27% E-Minis 1,205 1,238 -3% <strong>Equity</strong> Standard 102 95 7% Foreign Exchange 296 163 82% Commodities 53 45 16% Sub Total 4,041 3,420 16% trakrs 22 86 -74% Total VENUE 4,063 3,506 18% Open Outcry 1,054 1,516 -30% CME Globex (Ex trakrs) 2,942 1,868 57% Privately Negotiated 45 36 25% Source: CME June 1st 2005 setting the organisation’s vision and developing growth strategies to expand the exchange’s core business and global distribution. It is a particularly good time to be CEO at the CME. Over the last five years, it has morphed into the largest futures exchange in the US and the world’s largest clearing house for futures and futures options contracts. The exchange’s products have sounded a particular resonance to contemporary investors, providing as they do a means for hedging, speculation and asset allocation relating to the risks associated with interest-rate movements, equity ownership, and fluctuations in foreign currency (FX) values and the prices of commodities – including cattle, hogs and dairy. The CME launched the first of its stock index futures contracts based on the S&P 500, back in 1982. Today, it trades Eurodollar contracts and futures and futures options on an ever-widening variety of indices, including the NASDAQ-100, S&P/BARRA Growth and Value <strong>Index</strong>es, Sep-04 Dec-04 Mar-05 Data as at June 05. Source: <strong>FTSE</strong> Group/FactSet Limited, US Dollar price indices. and the Nikkei 225, as well as its electronically traded E-mini S&P 500 and Emini NASDAQ-100 contracts, that are among the fastest growing products in the industry’s history. Most recently the CME added futures contracts on three of the largest and most popular exchange traded funds (ETFs – baskets of securities designed to track an index). The move is significant. The fast growing US ETF market is 69
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