CME Preempts NYSE Treasury Derivative Trading, Offers 65% Margin-Reducing Treasury Trading Solution

Who said the CME can only hike margin rates? Today, the Chicago Merc announced that is "unveiled a cross-margining plan that would help customers trading both interest rate and Treasury futures, as the world's largest derivatives exchange prepares for more competition." The step is a preemption of a comparable product to be offered by its recently sold competitor, the NYSE Borse. "The New York Stock Exchange parent expects in March to launch NYSE Liffe U.S., a rate futures market, at the same time as its partly owned New York Portfolio Clearing (NYPC) clearinghouse for the products." In addition to confirming that this step pretty much puts an end to persistent rumors that the CME may overbid the DB for the NYSE, what it also shows is that the exchange is perfectly willing to do anything it wishes when it comes to margin rules as suits it. "CME's new membership class -- called Financial Instruments Clearing Membership (FICM) -- would provide margin benefits of up to 65 percent between interest rate futures and Treasury securities, it said." While we have yet to see a practical example of what this means, we predict that the implication is a major drop in margin requirements when trading products determined to be a national interest such as Treasurys.

From Reuters:

[The FICM] is expected to launch by the end of the current quarter, CME said. The company named four trading firms that have tested the offering and are working toward becoming FICM members.

Underlining the importance of derivatives businesses, Germany's Deutsche Boerse bid this month to acquire NYSE Euronext -- a combination that would dominate European futures trading and squarely take on CME on the global stage.

Before this happens, however, expect for several more rounds of margin hikes in any commodity that threatens to put a dent in the Fed's ludicrous worldview that record prices on the commodity board are driven by "demand."

Full press release from the CME:

New Financial Instruments Clearing Membership (FICM) Provides Margin Benefits of up to 65 Percent

CHICAGO, Feb. 28, 2011 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, announced the creation of a new clearing membership class for interest rate futures allowing for significant margin offsets between CME Group Interest Rate futures and U.S. Treasury securities. The Financial Instruments Clearing Membership (FICM), which is expected to be offered by the end of the first quarter, will provide margin offsets of up to 65 percent to qualified firms that trade both U.S. Treasury securities and CME Group Interest Rate futures products.

"We are establishing this new clearing membership category to provide customers who trade both U.S. Treasury securities and CME Group's Interest Rate futures with greater capital efficiencies, enabling firms to trade cash/futures strategies in a highly cost-effective manner," said Bryan Durkin, CME Group's Chief Operating Officer and Managing Director of Products and Services. "With our interest rate complex open interest at 37 million contracts or $30 trillion in notional value, the new FICM membership provides a strong value proposition for our global customers who trade these products."

The FICM membership category leverages existing infrastructure of firms that are active in both the U.S. Treasury securities and CME Group Interest Rate futures markets. The new membership class combines the benefits of CME Group's deep, liquid Interest Rates futures markets with our industry leading risk management financial safeguards and proven track record of CME Clearing.

A number of trading firms, including Breakwater Trading, Endeavor Trading, Henning-Carey Proprietary Trading, and HTG Capital Partners, have tested and validated the FICM membership and are working with CME Group to become FICM members. A full CME clearing member must sponsor the FICM and act as the firm's facilities manager to transact in the U.S. Treasury securities market.

To view a video of Derek Sammann, Managing Director of Interest Rate and FX Products, talking about the new FICM, visit: http://at.pscdn.net/008/00102/videoplatform/110223FICM_Ext.html



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