FTSE Global Equity Index Series

DERIVATIVES REPORT: CME
70
reported to have combined
ETF assets under custody
of some $226bn (as of the
end of last year), with the
S&P 500, NASDAQ-100
and Russell 2000 ETFs
accounting for about one
third of that amount.
New CME ETF futures
contracts that are based on
those indices began
trading on the CME Globex
electronic trading platform
in June. Futures on the
S&P 500 and NASDAQ-
100 indices continue to
trade exclusively at
CME. “Equity market
CME Outperforming Peers
participants want access to a broad array of products and
markets, and the growth of our CME E-mini S&P 500,
CME E-mini NASDAQ-100 and CME E-mini Russell 2000
contracts makes the ETF products a natural addition,”says
Donohue. The move also portends a broader long term
marketing initiative by the exchange. The addition of the
ETF futures means, “we will be able to attract more new
customers, particularly sophisticated retail equity
investors,”he adds.
Aggressive accretion of market share, wherever it might
be, has been a priority for the exchange since at least the
turn of this century. Between then and now the CME has
assumed a more uncompromising character. It is a
transformation kick-started by demutualisation in
November of 2000 and a subsequent successful IPO in
December 2002 with shares priced at $35 (these days the
exchange’s shares trade in a high low range of $181 to
$235). Contiguous developments include virtually
continual product and technology innovation, expanding
global distribution and the establishment of strategic
partnerships in Europe and Asia.
The results are impressive. 2003 and 2004 were banner
years. The exchange’s net revenues rose 37% last year to
reach $733bn, with net income up 80% to $219m based
on an operating margin in the year of 50.1%, compared
with 38.5% in 2003. But 2005 threatens to outclass even
that performance. The trend, for the moment is but one
way. Donohue explains that record volumes across all
major product groups were and are “spurred by the
phenomenal growth of electronic trading.” In particular,
the exchange’s performance reflected the additional
revenues generated from clearing Chicago Board of Trade
(CBOT) transactions (of which more later).“Not bad for a
company that began modestly in 1874 with the
establishment of a private association in Chicago to help
butter and egg dealers,”he smiles.
The CME also currently manages more than twice as
many futures and options on futures contracts than any
other futures clearing organisation in the world, and over
Average Daily Volume (round turns, in millions)
5
4
3
2
1
0
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
4.5 – CME
3.5 – Eurex
3.0 – CBOT
2.0 – Euronext.
liffe
2Q
05
through
May
NOTE: Based on futures and options on futures. Excludes individual equity options.
© Chicago Mercantile Exchange Inc. All rights reserved.
90% of all US futures
contracts. “Our electronic
trading business
continues to grow rapidly
due to our focus on
expanding functionality,
capacity, distribution and
access to our CME Globex
trading system,” says
Donohue. “As new
electronic trading groups
and individual electronic
traders continue to emerge
in markets globally, CME
is competing to attract
their business.”
The CME has also
ridden a flow tide of
business. According to the most recent Futures Industry
Association report, the volume of global futures and
options trading grew 8.9% to total 8.89bn contracts in
2004, with even more growth expected this year. Futuresonly
volume, for example, topped 3.5bn contracts, up
16.3% on the year. Options trading grew more slowly
however, rising 4.6% to 5.4bn contracts, mainly due to
lower levels of trading in Korea’s Kospi 200 index option.
Although volume rose in all sectors, trading in FX grew
the most, surging 35.4% to 105.4m contracts worldwide.
The largest volume in this category was, in fact, the Bolsa
de Mercadorias & Futuros’US Dollar futures contract (up
42.7% to 23.9m contracts for the year). In context,
volume on the CME’s Euro FX futures product almost
doubled over the same period, rising 82.7% to 20.5m
contracts in the year.
Interest rate products apparently maintained their lead
as the world’s most active futures contracts. And while the
CME’s 3-month Eurodollar future gained an additional
42.5% to 297.6m contracts to remain the world’s largest
futures contract, in a countertrend, Eurex’s Euro-Bund
declined slightly, down 1.9% to 239.8m contracts.
Meanwhile, in the dynamic top ten derivatives exchange
league tables, the CME moved past Euronext.liffe in
December last year to become the world’s third-largest
global derivatives exchange.
Performance records aside, in the sedate setting of the
CME’s South Wacker Drive’s offices, Donohue muses over
the emerging view of the CME as a latter-day Galactico
among global exchanges.“Conversion from a membership
organisation to a publicly traded company fundamentally
transformed us,” declares Donohue, though he concedes,
the going has not been easy and back in 2001, nothing was
certain. Though bullish on “the future of our industry,” he
stresses “it was not always so.” “Everyone says,‘well, it was
easy, or that it was well timed.’I tell you, it was not obvious
to us. The risk of failure was real enough. It was out there.”
Challenges were becoming apparent even as the century
opened and the global financial markets began to assume
JULY/AUGUST 2005 • FTSE GLOBAL MARKETS