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Interest Rate Volumes Fell for CME: Will New Products Help?

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Near-zero interest rates

CME Group (CME) purchased the Chicago Board of Trade (or CBOT) in 2007 to expand its rates business. Since then, near-zero interest rates have led to lower returns for the company. However, as the Federal Reserve gears up for further interest rate hikes in 2016, CME could see a substantial increase in rates trading. It reported interest rate volumes of 6.1 million in 4Q15, down from 7.4 million in 4Q14.

Interest rate volumes contribute almost 46% to the company’s total volumes. The average rate per contract increased to $0.52 during 4Q15 compared to $0.47 in 4Q14, partially offsetting a decline in volumes.

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The company’s interest rate activity remained subdued over the past few quarters, in spite of an interest rate hike in the fourth quarter. Volatility in rate products declined over the past few months. The activity is expected to be subdued in the wake of a slowing global economy and lower commodity prices.

CME generated an operating profit margin of 61% in the last fiscal year compared to its peers:

  • NASDAQ OMX Group (NDAQ): 20.2%
  • Intercontinental Exchange (ICE): 46.8%
  • CBOE Holdings (CBOE): 50.8%

Together, these companies form 1.9% of the Financial Select Sector SPDR Fund (XLF).

Investing in new capabilities

CME has launched new products such as Ultra ten-year Treasury futures and options, Mexican Peso IRS (Interest Rate Swaps) Clearing, and Brazilian Real CDI Swap Clearing. In the Ultra ten-year Treasury product, 400,000 contracts have been traded since its launch, and it has surpassed previous all-time new product volume records for the first three weeks established by Dow futures.

The company is also working with TriOptima to offer multilateral compression for interest rate swaps for FCM (Futures Commission Merchant) house accounts. The company is also planning to bring products covering Swaptions in the near future.

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