The CME, which runs the Chicago Mercantile Exchange, said on Monday it was applying to the British Financial Services Authority for approval to open in the middle of next year a London-based market trading currency futures.
"Our application to establish an exchange in Europe fits within our strategy to grow organically and is an important next step to meet the growing regional demand from our customers," said CME Chief Phupinder Gill.
Robert Ray, CME's managing director of products and services, will become chief executive officer of CME Europe, the company said.
"Launching with a suite of foreign exchange products allows us to leverage our 40 years of experience in FX futures for customers in the region who access the futures market during the London business day, but we also plan to look at expanding into additional asset classes," said Gill.
The announcement made in a regulatory filing marks a major step forward in the CME's European plan and represents a threat to NYSE and Deutsche Boerse, which dominate European futures with their Liffe and Eurex exchanges.
"In the short term this is a only a minor threat to NYSE and Deutsche Boerse because the CME is not launching a competing product, though they could well offer rival products over time," said Richard Perrott, an exchange analyst at Berenberg Bank.
NYSE's Liffe and the Boerse's Eurex have over 90 percent of trading in some European contracts and it was the threat of a monopoly that forced the competition authorities to block the planned merger between those exchanges earlier this year.
The CME, which also runs the Chicago Board of Trade and the New York Mercantile Exchange, has a fight on its hands, however, as the incumbents will likely defend aggressively their home markets.
"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," said Perrott.
The move comes as European regulators look to overhaul the region's derivatives business by encouraging competition in futures trading and standardising the vast and largely unregulated over-the-counter (OTC) derivatives.
The authorities want to make large chunks of the $700 trillion OTC derivatives market, which is traded privately between banks and hedge funds, trade 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 Perrott.
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.
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