CME in 'strongest position' for deals, CEO says, despite rising competition

Bgc

20/10/2023 11:00

By Laura Matthews
       NEW YORK, Oct 20 (Reuters) - CME Group  CME.O  is in
strong position to make acquisitions, armed with low debt and
robust earnings, Chief Executive Officer Terry Duffy told
Reuters, even as the world's largest derivatives exchange
operator faces rising competition.
    Exchanges have been consolidating over the years and some
have expanded beyond market-sensitive businesses like trading to
pursue more predictable revenue.
    CME, however, has registered three consecutive years of
revenue growth as demand for hedging increased because of market
volatility. 
    "I believe that we have put ourselves in the strongest
position of anybody in our space globally as it relates to
potential M&A," Duffy said in an interview, citing CME's strong
earnings and AA- credit rating.
    CME recently recorded its eighth-consecutive quarter of
double-digit earnings growth.
    CME's debt is less than one times its EBITDA, Duffy said,
below the ratio of rivals Intercontinental Exchange  ICE.N ,
Nasdaq  NDAQ.O  and CBOE  CBOE.Z . 
    "Our capacity is much greater than anybody else's," Duffy
said. "It doesn't mean we're going to do anything. If I think it
benefits my users and my shareholders, we have the ability to do
it."
    CME had $2 billion in cash and $3.4 billion of debt as of
June 30, recent earnings show. Its stock price is up 28% this
year, compared to a 11% gain for the S&P 500. 
    
        Some analysts question whether CME can sustain growth
internally when interest rates become more predictable,
volatility decreases and more competition enters the exchange
space.
    Andrew Bond, senior fintech analyst at Rosenblatt
Securities, has a sell rating on CME, saying "competitive
threats are increasing to their business". 
    In particular, BGC Group  BGC.O  plans to launch Fenics
Markets Xchange (FMX), a futures exchange for interest rate
derivatives, pending regulatory approval.
        A BGC representative was not immediately available for
comment.
    Bond said the most obvious candidate for acquisition is
CBOE, a Chicago-based exchange operator whose shares rose nearly
3% in September on deal speculation after its CEO resigned. 
    Such a deal may be complex, however, involving spin-offs and
antitrust concerns, Bond said.
    Duffy declined to comment on potential targets. CBOE also
declined to comment.
    Investors would like CME to generate more stable sources of
revenue for periods when markets are not volatile, Bond said.
    CME generates more than 80% of its revenue from
transactions, he said, and having other sources of revenue would
help when trading volume growth could be difficult.    
    Duffy's last big acquisition was Nex Group in 2018 for $5.5
billion, following large deals to acquire Chicago Board of Trade
and New York Mercantile Exchange a decade earlier.
    But Duffy said he does not believe CME needs acquisitions to
grow. CME could boost trading volumes as investors increasingly
need to manage risk, he said.
    Open interest, which tracks the number of open positions in
a contract, has steadily increased in CME's rate products over
the last three years.
  
  
    The U.S. Federal Reserve's interest rate hikes led to record
high average daily volumes at the exchange. Duffy, however, said
a rate pause would still benefit CME because investors have
views about where rates are heading, which will further boost
trading volume.
    
  

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CME's Interest Rate Future/Options Open Interest    https://tmsnrt.rs/48YGb40
CME's Interest Rate Future/Options Average daily volume    https://tmsnrt.rs/46zGPTV
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 (Reporting by Laura Matthews; editing by Megan Davies and Rod
Nickel)
 ((Laura.Matthews@thomsonreuters.com; 646-540-2256;))