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Story Retrieval Date: 4/17/2015 11:22:54 AM CST

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CME Group's turn to move into Asian commodities markets

by Chiara Milioulis
Mar 4, 2014


Bill Badzo

The Chicago Board of Trade, one of the exchanges owned by CME Group Inc. 

It’s now the “Merc’s” turn to make a move.

CME Group Inc., locked in a race to extend its global footprint against rival IntercontinentalExchange Inc., found itself outflanked in Asia by ICE’s just completed takeover of the Singapore Mercantile Exchange.

The $150 million transaction now intensifies pressure on Chicago-based CME Group, the world’s largest owner of commodity exchanges, to carry out its own acquisition in the high-growth Asian market.

“It would be unwise for CME to sit on the sidelines while these exchange assets get gobbled up,” said Bruce Weber, dean of the Alfred Lerner College of Business and Economics at the University of Delaware.

Indeed, while CME Group has not commented on any possible acquisitions, the company has indicated an interest in expanding overseas in ways other than joint partnerships. According to the company’s 2013 10-K report to the Securities and Exchange Commission, the goal is “… increasing our presence in major international financial centers as well as partnering with leading exchanges around the world.”

The company appears to have sufficient cash and share-price strength to venture onto the acquisition trail—for now. While possible Asian targets mentioned have included the Tokyo Commodity Exchange and the Australian Commodities Exchange, one strong possibility is in Hong Kong, according to Weber, not China itself.

“The market for companies in China is not a free and open one,” he said. “I’m not sure if China would necessarily be the best place to buy an exchange right now.” Weber said the Hong Kong Mercantile Exchange is a natural choice because it serves as the financial hub of the Asian region.

CME Chief Financial Officer Jamie Parisi said the CME is eager to extend its global opportunity, especially in Asia.

He revealed during the annual Credit Suisse forum, February 12, that CME plans to increase its $120 million volume coming out of Asia by fostering more relationships in China.

But one New York-based global commodities macro trader described China as a difficult arena to perform business in. “It promises you a lot to entice you. At the end of the day, China never wants to consummate the marriage. The CME has placed a lot of bets on China and it hasn’t yielded a lot,” he said.

CME, however, appears to have sufficient clout to do a deal elsewhere in the region.

For all of 2013, the company’s free cash flow-to-revenues ratio was an impressive 39.3 percent, according to figures by Bloomberg Finance LP. For 2012, the CME Group’s free cash flow as a percentage of revenues was 37 percent compared with ICE’s 51 percent. In general, a company that has a free cash flow-to-revenues ratio over 10 percent is considered cash-rich.

Moreover, while CME Group’s closing share price Tuesday of $76 per share is not at its 2013 high of $82.06, reached on December 18, Mark Frank, a former CME Group broker, said the company is still able to do a stock-for-stock transaction.  “If the share price goes higher, it is worth a lot more and they don’t have to issue as much stock at that point to purchase whatever they’re looking to get a hold of to make an acquisition,” he said.

CME Group was confronted with a test of its clout in the race for dominance of the world's commodities exchanges when ICE extended its international repertoire with the $150 million purchase of the Singapore Mercantile Exchange.


The purchase added to ICE’s already existing 24 regulated exchanges and marketplaces and six clearing firms in four continents. It also gave ICE an Asian trading and clearing license for derivatives.

“This transaction was completed with the vision for creating a truly global marketplace, where we’re serving our customers in their time zone and in the jurisdictions in which they do business,” said ICE CEO Jeff Sprecher in the company’s recent 4th quarter earnings call.

Still, John Lothian, publisher of John Lothian News, said the acquisition should not be celebrated just yet.

“[ICE] bought a shell of a company,” he said. “Now it needs to be able to go in there and establish new contracts and build up the infrastructure and the liquidity in order to make those a go. That’s not a ‘snap your fingers’ thing to do.”

Although ICE is significantly smaller than the CME, its global reach far extends the Chicago-based exchange. In 2013, CME’s revenue from outside the U.S. totaled 22 percent compared with ICE’s 45 percent.

Even CME’s 2008 acquisition of the energy and metals exchange NYMEX Holdings Inc. was overshadowed when ICE acquired the international exchange operator NYSE for $8.2 billion last year, winning Euronext as a result. The deal also gave ICE an ownership stake in clearinghouses in the U.S., Canada, Brazil, Europe and Asia.

“I think little by little, ICE has gained a lot of traction, has politically gained a lot of ground and is starting to make headways,” said Mark Frank, a former CME Group broker.

Parisi said CME is definitely trying to position itself as a player in emerging markets in 2014.

“Emerging markets are one of the areas we have been focused on making some investments around the globe in local exchanges or doing cross-licensing arrangements for symbiotic relationships,” he said.

Lothian argued emerging countries represent a tremendous growth opportunity in the global market. “High population countries like China and India have incredible wealth because of globalization and national resources,” he said.

Valuations for the exchanges are pretty high, creating an incentive for acquiring firms to want to build a global base and increase volumes, Frank said. “It’s a matter of keeping up with the competition,” he argued.

Still, trading experts say both ICE and CME are head-to-head in the global footrace and will continue to keep each other in check.

“The CME is definitely looking over its shoulder and watching ICE,” Frank said. “I think they’re both watching each other.”


(Revised 10:45 pm CST, 3-04-14)