The world’s shift to a new interest rate benchmark is giving rivals their best chance in decades to breach a key CME Group stronghold.
When U.K. banks decided to kill the Libor benchmark two years ago, they put in danger a fifth of futures giant CME’s daily trading volume, namely trading in eurodollar contracts. Now CME is scrambling to protect its franchise by launching new contracts tied to other benchmarks. But rival exchanges are launching similar products, setting up a competitive battle in a market CME has dominated for decades.
Libor is a linchpin for the biggest product group traded at CME, its eurodollar options and futures contracts. That CME market is also the biggest interest rate trading arena in the world, with activity valued at $4.5 trillion daily, on average.
“Challenges loom large because of the potential splintering of the (new interest) rates,” says Matt Kluchenek, a lawyer at Mayer Brown in Chicago who specializes in derivative issues and works with trading firms. “Eurodollar futures and options was an entrenched product (group at CME), and a very successful one, so in a sense this resets the playing field.”
CME’s eurodollar trading could wane as the 2021 expiration year for the scandal-ridden London Interbank Offered Rate approaches, so CME is trying to preserve its business by shifting trading to its new rate contracts, including the secured overnight financing rate (Sofr) in the U.S. and the sterling overnight index average (Sonia) in Europe. CME…