Industry Report: Reuters and CME launch FXMarketSpace

Heather Maclean talks to Reuters and the Chicago Mercantile Exchange about the launch of their worldwide electronic foreign exchange marketplace initiative, FXMarketSpace.

Reuters and CME are set to launch a worldwide electronic foreign exchange marketplace with central clearing. The equal joint venture will see the pair creating FXMarketSpace, an independent entity that will be a culmination of both companies’ expertise and technology. FXMarketSpace will operate as a separate third party capitalised by both firms. The pair will invest up to $45 million each into the joint venture to get it to profitability.

FXMarketSpace will be worth the cash says Michael McCorkle, who is currently treasury business manager at Reuters, and will move to the new venture in a sales capacity. He comments: “We see excellent growth potential for what we feel is a small investment due to the growth of the FX market. FX has experienced some very robust growth after being written off a few years ago, and we expect it to grow further.”

Rick Sears, who is set to move from CME to the new business where he will become its chief sales officer, adds: “This is not just another matching engine for FX. This is an initiative to build a robust market space. This is an alternative. There isn’t an exact model for this. We’ve found two partners who can make this unique, which makes FXMarketSpace’s offering compelling. Reuters has been a household name in FX for decades, and CME has been the same in financial futures. Our joint commitment of almost $100 million to make this initiative work is also unique.”

Three directors from each company will create the board at FXMarketSpace, including Reuters’ chief executive officer, Tom Glocer and its executive director and president of the Business Division, Devin Wenig, plus CME’s chief executive officer Craig Donohue, chairman Terry Duffy and chairman emeritus, Leo Melamed.

The leaders of the joint venture on the ground are to be Reuters’ Mark Robson as chief executive officer, and CME’s Richard Sears as chief sales officer and Bryan Hunter as chief operating officer.

Development of the platform has already begun and the venture should launch in early 2007, with profitability being reached in 2008. The big six currency pairs are on the line up for FXMarketSpace, with the Euro, Yen, Swis Franc, Canadian Dollar, Pound Sterling and Australian Dollar, plus four crosses. The company will launch with FX Spot, and around nine months after that will hit the market place with Forwards. Depending on how those products go, Sears says FXMarketSpace will then go ahead with FX Options. He adds: “For now though, we’re focused on getting things up and running on Spot.”

Principles behind FXMarketSpace
The idea for FXMarketSpace came about for a number of reasons. Both Reuters and CME have realised that foreign exchange has emerged as a strong asset class that can be exploited further. With more non-bank financial institutions operating in the FX market and the simultaneous growth of online and algorithmic trading, both parties have identified a gap in the market that can potentially broaden the number of traders in this growing space by bringing electronic FX trading to a wider audience.

“The interbank market is used to the OTC market and so combining them with the strengths of CME, in the whole clearing and central counterparty method, results in removing the need for credited remediation in the market.”
Rick Sears“Most of the feedback we’ve got on the effect of this on CME FX Futures is that FXMarketSpace will only serve to grow trade.”“FXMarketSpace will provide operational efficiencies around settlement, with lower CLS fees and low latency, resulting in an overall reduced cost in trading.”
Rick Sears
“Most of the feedback we’ve got on the effect of this on CME FX Futures is that FXMarketSpace will only serve to grow trade.”

“FXMarketSpace will provide operational efficiencies around settlement, with lower CLS fees and low latency, resulting in an overall reduced cost in trading.”
Sears explains: “The fundamental principle behind FXMarketSpace is the market is always demanding increased efficiencies, from another drive through burger joint to more computing power. We thought that by bringing our two companies together, our core competencies could go some way to solving the demand for more efficiencies in electronic FX trading, with execution, low latency matching engines, greater anonymity, straight through processing, settlement and centralised clearing. In the end, it’s back to creating greater efficiencies for the customer.”

FXMarketSpace will grow the FX market overall, Sears comments: “Most of the feedback we’ve got on the effect of this on CME FX Futures is that FXMarketSpace will only serve to grow trade.” Sears adds: “The company will have a heavy emphasis on the markets and customer on-boarding. CTAs, prime brokerage units of banks, hedge funds and prop shops are demanding more access to centralised pools of liquidity, so there’s a lot more buy side demand for access to this kind of company.”

Removing credit constraints
McCorkle comments: “It’s very exciting to go and be a part of what we all see as the next step in the FX market. I think FXMarketSpace is seeing the evolution of the market through to the next step. We’re going into this with the idea that this is the way the market wants to go. FX in general is growing as an asset class, and this will remove some of the credit restraints to allow it to grow even more. The removal of credit restraints means the growth in trade volume. We are fostering growth in the FX market.”

FXMarketSpace is set to become a global force to be reckoned with, Sears and McCorkle state. The joint venture will be based in the UK under the Financial Services Authority. It will provide an electronic trading platform that will offer the over the counter FX market with anonymous cleared trades. That FX market is the most actively traded asset class globally, worth around $2 trillion (BIS Survey 2004 said $1.9 trillion trades per day) in daily call around and electronic trades combined.

Seeking approval
FXMarketSpace is still subject to regulatory and shareholder approval, McCorkle says: “European anti-trust clearance is the main thing we’re waiting for, as the first level of clearance we need. At the moment we are dealing with customers in an information sharing manner on this. Once we have clearance, we’ll be able to go forward and get into pricing models and solicit customers for their feedback in a much more detailed manner.”

Both parties are confident that what they propose will be an asset to the marketplace and will drive more foreign exchange trades globally, as well as more business to their respective companies. FXMarketSpace will be accessible through the CME Globex® electronic trading platform, Reuters Dealing 3000 for interbank trading and Reuters Trading for Foreign Exchange for dealer to buyside connectivity. The new project does not therefore detract from either company’s existing concerns, none of which will become part of the new entity.

Customers of FXMarketPlace will benefit from the use of CME’s clearing and matching capabilities and Reuters’ desktop technology and network, with trading access, trade notification and market data. Additionally, customers will be able to trade anonymously, receive transparent prices via the CME Globex platform and central counterparty clearing services through CME Clearing, plus the additional electronic FX trading plusses of decreased costs and straight through processing.

McCorkle comments: “The interbank market is used to OTC market conventions so our intention is to offer a product with these characteristics along with the strengths of the CME around clearing and a central counter party. This will remove the need for bi-lateral credit intermediation in the market meaning that all prices will be available for trade by all participants. Reuters is bringing its very strong global desktop footprint to the venture with a user base of more than 100,000 on its flagship information desktop -- Reuters 3000 Xtra -- and a community of 18,000 Dealing 3000 terminals. Of that 18,000 around 7,000 are using the Matching product to trade FX spot, forwards and options. FXMarketSpace will be made available over both Dealing 3000 and 3000 Xtra with Reuters providing the installation and support.”

Cost efficiencies
Sears adds: “From a credit perspective in a central counterparty model, everyone will have access to the best prices in the market. And because it’s a central counterparty, we can do post trade settlement with one payment per currency per day.”

McCorkle continues: “The big benefit, particularly for the buy side, is that the removal of bilateral credit restraints in this cleared model will allow buy and sell side institutions to trade with counterparties they were unable to trade with before.” And cost efficiencies will be increased through FXMarketSpace, McCorkle adds: “Post trade settlement netting will result in cost efficiencies that will be passed on to end users. For prime brokerage and the clearing side of banks, there will be increased fee income opportunities, which can also be extended to their client base.”

Sears agrees: “FXMarketSpace will provide operational efficiencies around settlement, with lower CLS fees and low latency, resulting in an overall reduced cost in trading.”

And so now what remains to be seen is how these two gilt-edged parents manage to work together in their new venture and grow the company. Watch this space.