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CME transforms business model to meet customer needs in a new Century
The Chicago Mercantile Exchange (CME) is poised is to complete the most significant transformation in its 102-year history-converting from a member-owned, not-for-profit institution to a for-profit public corporation. This transformation comes at one of the most dynamic times for financial markets in general and for exchanges in particular. Almost daily, we read of new entrants, mergers or shakeouts among traditional exchanges and their nascent, for-profit electronic competitors.
The institutions that form the traditional exchanges' historic customer base are joining together to form ECNs or other partnerships in order to conduct their trading businesses more efficiently, at lower cost and with a focus on the goal of becoming a profit centre for the institutions themselves. At the same time, trading volume on many traditional exchanges, including the Chicago Mercantile Exchange, is at all-time record high levels. Customers are turning to us more than ever before for the liquidity, transparency and safety our open outcry and electronic markets provide.
Yet we believe the paradigm of a membership organisation is no longer the one best suited to serve our customers and stakeholders going forward. A profit-driven business model, putting customers first and aligning the success of our members/shareholders, other equity holders and staff with the success of our enterprise is the optimal model to propel the CME to further innovation in financial services and risk management. Our members will have the opportunity to approve this "demutualisation" by a vote on June 6, and we are confident they will embrace this new corporate structure for the CME.
U.S. Exchanges Move to
Exchanges everywhere are recognising that the "members only" committee-governed environment does not provide the speed, flexibility and agility needed to compete in an age of Internet-speed movement and decision making in financial markets. Rather than possessing near monopolistic franchises in flagship products, U.S. exchanges now face significant competition from both overseas competitors and OTC markets.
More specifically, we are seeing monumental changes take place in the two main drivers of our business: technology and regulation. As technological developments continue to impact the way we and our customers can do business, and as we enter an increasingly deregulated environment, we must prepare ourselves for an atmosphere of continuous change and immediacy the likes of which we have not seen in our history. What's more, these technological and regulatory changes are exponentially increasing the number and types of competitors we will face.
That commitment requires a governance structure conducive to fast decision making, a corporate structure that allows us to access capital and the ability to partner with those who can provide what we may not have. In short, our new for-profit structure will enable us to do just that.
Already, connecting to the CME grows ever easier as Independent Software Vendors (ISVs) provide front-end interfaces with the CME's GLOBEX2 electronic trading system, and as firms take advantage of the system's open architecture by writing to the CME FIX API (Application Programming Interface), the latest generation of electronic APIs supporting connections to the CME's order routing and order management systems in addition to GLOBEX2.
Single-stock futures, prohibited for 18 years in the United States but effectively traded on the options exchanges and in the OTC market, may finally be one of the tools we can offer our end-users as a complement to our extensive selection of equity index futures and options.
In the end, we believe market forces, rather than regulatory barriers, should determine which products succeed. By levelling the playing field for domestic exchanges, overseas markets and OTC markets, Congress can take a significant step in the direction of making regulation more equitable across the board. Customer protection, naturally, will take the highest priority, and no one has greater interest in protecting customers and preserving the integrity of the markets than exchanges and their clearing organisations. Products will be successful where markets provide the best prices, most transparency and greatest safety at the lowest cost.
Relationship with the
Global Banking Community
At the same time, thanks to consolidation in the industry and the rapid proliferation of OTC products, we've seen that our members are also our customers and even our competitors. That concept of "competition" brings both challenges and opportunities. So how can we make the most of this new business environment?
Intense Customer Focus
At the same time, we know that customers are demanding a what-you-see-is-what-you-get trading environment. That is, when they place an order, they want immediate confirmation that it has been received, immediate execution and immediate confirmation of the fill. They want breadth of product and around-the-clock access from anywhere in the world. And if we don't provide it, they will go elsewhere.
We are providing the market transparency, liquidity and creditworthiness that market participants look for, both in our electronic and our floor trading environments. In more and more products, customers have the choice of either a floor-traded or an electronically traded variant of a product. Customer choice will drive the products we offer and the trading environments-whether electronic on the floor-in which they are offered.
We recognise that the way we will best create shareholder value is through successfully meeting our customers' needs.
Access and Efficiencies
Now we must take the concept of global access to even newer and greater heights.
One of the ways we are able to increase our distribution, product breadth and access to our markets, along with cost efficiencies is through the formation of global alliances.
The GLOBEX Alliance we formed last year with exchanges in Paris, Singapore, Montreal and Brazil will provide customers with electronic access to the financial products of these global exchanges. In addition, cross-margining agreements will provide firms with capital savings in instances where positions on one exchange may offset the risk of positions on another.
Additionally, the CME's partnership with LIFFE-the London International Financial Futures and Options Exchange-offers customers convenient electronic access to the two most actively traded short-term interest rate products in the world, CME's Eurodollar and LIFFE's Euribor, along with cross-margining of these products. The agreement also provides for cross-exchange access to the electronically traded products of both exchanges.
On an average day, our Clearing House Division acts as custodian for nearly $20 billion in performance bond assets backing market positions taken by customers, members and member firms. Each day, the CME Clearing House moves an average of $970 million through the system, as trades representing an underlying value of $471 billion take place each day in our markets. In 1999, the dollar volume of contracts traded was $138.3 trillion-more than seven times greater than the gross national product of the world's five largest economies.
The CME, a leading innovator in financial markets and risk management for more than four decades, will shape changes in global financial markets in the new century. With a new, agile corporate structure, new partnerships and new products that expand the horizons of traditional exchange parameters, we look forward to serving a growing customer base of institutions and individuals who expect the highest standards of integrity, openness and responsiveness to their risk management and investment needs.
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