As derivatives markets grow across the globe, from Latin America to Asia, exchanges are looking well beyond their borders for customers. CME Group’s recent slate of partnerships have enabled such markets to reach a truly global audience.
When looking at the global exchange landscape one trend is rapidly emerging – access.
Exchanges have forged global networks, creating opportunities for traders to access contracts from countries that have previously been difficult, if not impossible, to reach. What is emerging is a truly global marketplace where benchmark contracts are accessible to traders within some of those emerging financial markets.
CME Group has been offering customers cross-border access for decades. But in recent months it altered the global derivatives space with targeted partnerships in Latin America and Asia. In Brazil, for example, CME Group’s equity stake in BM&FBOVESPA also includes an order-routing agreement whereby CME Globex customers can access Brazilian contracts and vice versa. In February 2010, the exchanges enhanced the relationship, with BM&F taking a larger equity stake in CME Group and both organizations agreeing in principle to develop a new multi-asset class trading platform.
Then in March, CME Group announced a deal to take a 1.9 percent equity stake in Bolsa Mexicana de Valores (BMV) and its Mexican derivatives exchange subsidiary, MexDer, along with an order routing agreement for derivatives products. The order routing is set to begin in 2011 and give BMV customers access to CME Group benchmark contracts, while CME Group customers will have access to MexDer’s interest rate and equity index derivatives.
What is equally interesting about such deals is the ripple effect they have on other key industry participants. Trading software and technology firms have also offered connectivity to such markets through their networks. Trading Technologies (TT), for example, announced in April it was offering its customers direct market access services to BM&FBOVESPA and will establish a new data center co-located with that exchange. This complements existing services that enabled customer access through TT’s connection to the CME Globex electronic trading platform. SunGard, a global financial information technology firm, announced in January plans to work with BM&FBOVESPA to develop automated clearing support.
Such service provides critical trading infrastructure for firms looking to access these markets as efficiently as possible. "The attitude around the world has changed about derivatives," says Craig Pirrong, professor of finance and director of the Global Energy Management Institute at Bauer College of Business, University of Houston. "Brazil is particularly important because it, and China, are the most dynamic of the BRICs, and Brazil is arguably the most advantageous for CME Group."
Eye on Asia
Exchanges have long pursued growth in Asia as well by taking equity stakes and creating technology partnerships. CME Group recently has taken the path of providing distribution via the CME Globex electronic trading platform for top Asian benchmark contracts.The Korea Exchange will offer the KOSPI 200 futures contract on CME Globex after Korean trading hours, thus giving the exchange an extended trading day as well as access to one of the best known and liquid stock index derivatives contracts in the world.
The exchange followed that with a cross-listing agreement in March with the National Stock Exchange of India (NSE). CME Group will list the S&P CNX Nifty Index (the Nifty 50), the leading Indian benchmark index for large companies on CME Globex in U.S. dollar-denominated futures. NSE will receive the rights to offer the S&P 500 and Dow Jones Industrial Average in rupee-denominated futures contracts.
The moves reflect the growing nature of the international derivatives markets. Countries such as Korea and India have steadily been opening up their markets not only to more outside investment, but also seeking distribution channels for their domestic products outside their boundaries through global platforms such as CME Globex.
"That’s a huge advantage for these exchanges to get their products traded by active U.S.-based participants," says Paul Zubulake, senior analyst at Aite Group. "For FCMs, the cost to connect to some of these exchanges was so high for the brokers. And the volume associated with that connectivity was not great enough to cover their costs. So it became a huge barrier to entry. Getting these products on a link through the Globex platform basically opens up these markets and is a win-win for everybody."
Going forward, Zubulake and other exchange experts say that more cross listing agreements are likely to continue. There are still clearing, as well as regulatory, issues that can be sticky for some participants. However, the long-term prospects for trading liquid markets in the U.S., Brazilian, Mexican, Korean and Indian stock index futures, among others, on one trading platform are compelling.
"Now we’re starting to see more correlation trading, where if something is happening in the United States, traders are looking for exposure in another country," Zubulake says. "That trend is taking people into these markets. And if it’s a liquid market, they’ll trade it."
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