By Luke Jeffs and David Sheppard
LONDON (Reuters) - CME Group Inc
The CME, which runs the Chicago Mercantile Exchange, said on Monday it was applying to Britain's Financial Services Authority for approval to open a London-based market trading currency futures in mid-2013. It plans to add other types of futures at a later date, Chief Executive Phupinder Gill said.
The CME's plan is a direct challenge to NYSE and Deutsche Boerse, whose Liffe and Eurex exchanges dominate trading in European futures, contracts to buy or sell assets such as bonds, currencies or commodities for a set price at a future date.
NYSE's Liffe and Deutsche Boerse's Eurex have over 90 percent of trading in some European contracts and the threat of a monopoly forced competition authorities to block the planned merger between those exchanges earlier this year.
The CME's proposal is a major step up in its European expansion ambitions and follows a challenging two years in which the exchange known as 'the Merc' has seen its flagship West Texas Intermediate (WTI) oil contract lose share to a London rival.
The IntercontinentalExchange Inc
CME already runs a London-based European clearing house for swaps, which serves to deal with some of the risks of trading these complex derivatives. In May it lost a year-long takeover battle for the London Metal Exchange.
Robert Ray, CME's managing director of products and services, will become chief executive officer of CME Europe, the company said.
The CME's move is timed to benefit from regulators' moves to overhaul the region's derivatives business by encouraging competition in futures trading and standardizing the vast and largely unregulated over-the-counter (OTC) derivatives market.
European policymakers have proposed technical changes in areas such as clearing and the licensing of indices to ensure that new entrants such as CME Europe can compete more effectively with incumbents.
Regulators also want to make large chunks of the $700 trillion OTC derivatives market, which is traded privately between banks and hedge funds, operate more like exchange-based products such as shares.
"There could be opportunities for the CME as the provider of clearing and trading services as regulators seek to push the market away from its current largely uncleared, largely bilateral, and largely voice-brokered model," said Richard Perrott, an exchange analyst at Berenberg Bank.
Regulators are keen to shake up OTC derivatives to tackle some systemic problems that arose after the collapse five years ago of Lehman Brothers, a big OTC trading bank.
The CME, which also runs the Chicago Board of Trade and the New York Mercantile Exchange, will likely have a fight on its hands as the incumbents aggressively defend their home markets, Perrott said.
"It tends to be difficult for new entrants to compete directly with incumbents in futures trading. The CME will need to offer something different in Europe, perhaps in terms of technology or clearing, and it is not immediately obvious what that will be."
CME has also been canvassing metals traders about the viability of an aluminum contract to rival that of the London Metal Exchange, which has dominated the $80 billion market for decades, industry sources told Reuters earlier this month.
(Editing by Erica Billingham)