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Catherine Ngai/MEDILL

CME Group Inc. reported a net revenue of $667 million in the fourth quarter, while  NYSE Euronext reported a net revenue of $640 million.

NYSE Euronext wants a piece of the CME Group interest rate futures pie

by Catherine Ngai
April 09, 2010

Despite the failures of other exchanges to enter the world of interest rate futures, a new competitor may soon rise to the challenge and the long-standing dominance of CME Group Inc. in those contracts.

NYSE Euronext unveiled plans Tuesday to enter the ring of interest rate futures by launching Eurodollar and Treasury bond futures in the third quarter.

The exchange will be operated through NYSE Liffe U.S., the global derivative business of the NYSE Euronext group. It will offer 2-year, 5-year, 10-year and 30-year U.S. Treasury futures.

“It probably has the most potential for any competitive threat in the industry market,” said Daniel Fannon, research analyst at Jeffries and Co.

Last July, ELX Futures LP started offering 2-year, 5-year and 10-year Treasury bond futures and eventually gained an approximate 3 percent market share. In 2003, Euronext-Liffe launched a competing Eurodollar futures contract, but it failed. BrokerTec Futures Exchange met the same fate. Euronext-Liffe was bought by the NYSE in 2007 to create NYSE Euronext.

This time around, the NYSE Euronext is depending on the approval and launch of New York Portfolio Clearing, an innovative joint venture with Depository Trust & Clearing Corp., to create more liquidity in the market. 

“We have worked hard to create a strong value proposition to our current customers and potential customers that support competition and innovation,” said Thomas Callahan, chief executive officer of the NYSE Liffe U.S. derivatives, in an e-mail.

While CME Group Inc. has approximately 97 percent of the Treasury futures market and a monopoly of the Eurodollar futures, Fannon is hesitant to predict how the launch will develop.

“It’s way too early to see if they’re going to be successful or not,” Fannon said. “The CME has a much broader value proposition for customers as they can trade multiple products. There’s always going to be a compelling reason.” 

CME Group says it's not afraid of a little rivalry.

“While we believe we have the best interest rate futures and options offerings available, we also recognize that competition is good for business,” said Michael Shore, associate director of corporate communications at CME.

The launch of the NYSE interest rate project, which has been two years in the works, will use the NYSE LIFFE CONNECT trading platform that matched in excess of 3 million futures and options contracts per day in Europe during 2009. The NYSE is also depending on equity partnerships with banks such as Goldman Sachs, Morgan Stanley and UBS, which own minor stakes in NYSE Liffe U.S.

As the two players enter the ring, the potential for competition augments.

“We love it, though effective competition is extremely hard to deliver because the barriers to entry are extremely high in this business,” Callahan said. “The end result is an innovative clearing and exchange platform that will offer the market something it has not seen before, something we think adds significant value and functionality.”

CME Group, however, remains confident.

“We have been competing with other markets for more than 150 years and believe that competition only makes our exchanges better,” Shore said.