UK OKs CME Group's Derivative Exchange - Analyst Blog

Fortifying its non-U.S. revenue sources, CME Group Inc. CME finally sought the approval from the UK authorities to build a derivative exchange in London. After being rejected twice, the company will finally launch the new trading platform on Apr 27, 2014.

Accordingly, UK's Financial Conduct Authority FCA and the Bank of England agreed to CME Group's derivative exchange in London, thereby ceasing a long process of application. The company was previously supposed to launch the exchange in Sep 2013 but delayed it twice due to non-recognition by the UK authorities, who dreaded of systematic market risks to foreign currency trading from the birth of CME Group's exchange.

Nonetheless, the launch of a derivative exchange in London will directly help CME Group tap clientele from across Europe, Middle East and Asia Pacific, particularly amid the rising demand for interest rate futures. Consequently, the company also plans to launch biodiesel and foreign exchange futures on Apr 27, which is expected to be followed by more interest rates, commodities, metals and equities derivatives within a year of operation.

The company's London-based CME Clearing Europe, launched in May 2011, is also functioning at its optimum capacity and delivering positive results now. Meanwhile, the latest expanse of derivative exchange in London not only enhances CME Group's revenue growth opportunities from the international quarters of Europe and Asia but also helps gain operating efficiencies and scale.

Additionally, CME Group's new exchange will boost its competitive position in Europe, where IntercontinentalExchange Group Inc.'s ICE Liffe and Deutsche Börse's Eurex primarily rule the local markets. With an achievement of largest trading volumes of more than $3 billion in futures and options derivative contracts in 2013, the company now looks forward to lead the European market.

We believe that the expansion into international avenues follows CME Group's organic growth strategy and should boost its financials in the future. This is crucial in the current scenario given that the company is facing restricted top-line and margins' growth due to sluggish volumes, higher expenses and regulatory challenges.

While both CME Group and IntercontinentalExchange Group carry a Zacks Rank #3 (Hold), some better-ranked financial stocks are Global Payments Inc. GPN and VeriFone Systems Inc. PAY. Both these stocks bear a Zacks Rank #2 (Buy).