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CT: CME to buy derivatives data provider

By Joshua Boak | Tribune Reporter
March 26, 2008

CME Group readied its push into the $46 trillion credit derivatives market with its announced purchase Tuesday of a London-based firm that helps price financial products not listed on exchanges.

The parent company of the Chicago Mercantile Exchange and Chicago Board of Trade will pay an undisclosed sum for Credit Market Analysis Ltd., which delivers pricing quotes and verifies average pricing data on over-the-counter deals for investment managers and hedge funds.

Over-the-counter trades traditionally occur between two known parties off an exchange. The arrangement lets investment banks develop exclusive financial products for trading, but it does not necessarily match prices against an entire market or guarantee the credit of the buyer or seller.

"CME Group's [over-the-counter] strategy has focused on identifying opportunities where we can leverage our strengths in technology and clearing services, which will create greater efficiencies and opportunities for market participants," said CME Chief Executive Craig Donohue. "It's impossible to overestimate the importance of accurate, timely and reliable sources of market data to the smooth functioning of financial markets, especially in today's environment."

Credit Market Analysis will remain headquartered in London. CEO Laurent Paulhac and other managers will continue running the company as a CME Group subsidiary.

Credit derivatives are part of a larger over-the-counter market with a notional value of $516 trillion, according to the Bank for International Settlements, a bank for central bankers. One common kind of derivative, the credit default swap, serves in theory as a form of insurance against default on a bond or other security. It is a contract that transfers financial risk from the owner of the security to the seller of the swap.

With the recent write-offs for securities tied to subprime mortgages, CME Group sees the lucrative chance to provide greater transparency to over-the-counter deals. Later this year, it plans to launch Swapstream, which will have a trading platform and central clearing for interest rate swaps.

And CME Group's proposed $9 billion buyout of the New York Mercantile Exchange would give it clearing services for energy commodities traded over the counter.

But this strategy also places CME Group in direct competition against European exchanges that also are angling to enter the over-the-counter space. At a recent panel, the heads of CME Group, German-Swiss partnership Eurex and NYSE Euronext-owned Liffe all indicated that the clearing of credit default swaps would be the next major shift for the futures industry, although it remains to be seen whether market participants are ready to yield some control to the exchanges.

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