Reuters: Regulatory News: UPDATE 2-ICE to take on CBOT in grains trading

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UPDATE 2-ICE to take on CBOT in grains trading Apr 12th 2012, 19:25 Thu Apr 12, 2012 3:25pm EDT * ICE plans to introduce agricultural futures contracts * Proposal needs CFTC approval * Contracts challenge cornerstone Chicago Board of Trade By Tom Polansek and John McCrank April 12 (Reuters) - IntercontinentalExchange Inc mounted the biggest challenge yet to archrival CME Group Inc's cornerstone U.S. grain futures business on Thursday, launching five lookalike wheat, corn and oilseed contracts. Aiming to leverage its benchmark Canadian futures contracts to grab business from the Chicago-based CME, ICE said the electronically traded corn, wheat, soybean, soymeal and soyoil contracts would start trading in May, pending regulatory approval. They will be cash-settled against settlement prices at the Chicago Board of Trade, which is owned by CME Group. "This is purely in response to really a significant amount of customer requests, in particular from our large global commercial customer base," said Ben Jackson, chief operating officer of ICE Futures U.S., referring to the launch. Trading commodities, including grains, is a multibillion-dollar business that has grown increasingly competitive as global demand for natural resources has surged. CME Group has been dominant in agricultural commodities in the United States, operating the country's only exchange for corn and soy. ICE said there were "substantial differences" between its new contracts and CME's contracts, given that ICE's products will be traded only electronically and will use its proprietary technology. Investment funds that trade grains without intending to take delivery or deliver the commodity could view the ICE contracts as an advantage, taking away trading volume from the CME. But traders and analysts quickly predicted ICE will struggle to attract business because of CME's dominance in the agricultural sector. Grains trading is already mostly electronic at CME, with 89 percent of its agricultural futures volume in the first quarter taking place on the screen. In addition to electronic trading, CME retains its traditional style of "open-outcry" trading in the pits. CME contracts "are global benchmarks that continue to offer the deepest and most liquid markets to customers around the world," said a spokeswoman for the exchange operator. TOUGH MARKET Analysts agreed it will be tough to grab business from the well-established CBOT, which CME acquired in 2007. Farm users will not easily change their opinion of the 164-year-old CBOT as the headquarters for grains trading, said Dennis Gartman, publisher of the Gartman Letter. "The odds of success are relatively minimal," he said. "Global grain elevators will comfortably stay with Chicago, unless ICE makes it much, much less expensive." ICE's fees will be competitive but it is not looking to start a "fee war" with CME, said Jackson. ICE is expanding in the grains markets as many farmers remain wary of the futures industry following the failure of brokerage MF Global last fall. Former MF Global clients, including many growers and grain elevators, are still missing an estimated $1.6 billion that was held in accounts at the firm when it collapsed. CME has been under fire since MF Global's bankruptcy because it was the brokerage's regulator at the exchange level. Customer money is supposed to be protected, even if a brokerage fails under broker regulations. ICE's plans "suggest they see an opportunity to make inroads in the business with some of the growing negative sentiment toward the CME," said Dale Durchholz, analyst for AgriVisor. Still, ICE will have to convince market participants they will be better off if they abandon CME for another exchange. It will be difficult for ICE contracts to get off the ground because customers will want liquidity from the start, said Terry Reilly, grains analyst for Citigroup. ICE acknowledged new futures products often face challenges but said agricultural customers are already familiar with the exchange through its contracts for sugar, cocoa, canola and other commodities. "Based on the volume of requests for these new products and customer commitments that they're going to be there, we believe that if anyone has a chance of success - we are positioned well," Jackson said. NYMEX BATTLE ICE, established in 2000 by a group of banks and energy companies, is taking on CME's Chicago Board of Trade contracts with a strategy it used six years ago in the oil market, when it launched a U.S. oil contract based on the CME-owned New York Mercantile Exchange flagship West Texas Intermediate (WTI) contract. This shot across the bow was originally viewed as a way to bolster ICE's flagship Brent crude oil futures contract and provide hedgers and speculators trading the trans-Atlantic arbitrage. ICE WTI has since gained a nearly one-quarter share of the U.S. crude oil futures market, according to year-to-date data from the exchanges, although its growth has been largely aided by the ability to lower trading costs for dealers who are also trading ICE's benchmark European Brent contract. NYMEX fought and lost a protracted legal battle with the ICE over the use of its crude oil futures price settlements in ICE swap contracts. In August 2007, a U.S. appeals court affirmed that ICE had the right to use those settlement prices to settle its swap contracts. The ICE WTI contract traded on average year-to-date 152,897 lots a day across all listed months, while the NYMEX crude contract traded 482,626 lots a day. CME faces challenges on other fronts, including an ongoing threat to its interest-rate futures business from ELX Futures and NYSE Euronext. ALTERNATIVE OPTION ICE's new contracts could offer Canadian traders savings in transaction fees and margins if they start spreading ICE canola futures or options against ICE's new soy contracts, said Ken Ball, broker for Union Securities in Winnipeg. They now trade ICE against CBOT soy, resulting in higher fees because they are dealing with two exchanges. "Spreading" refers to the practice of buying one contract while simultaneously selling another to better offset risk. ICE's launch of a U.S. wheat contract may in part be a move to boost its ICE Canada milling wheat futures, which launched in January and have open interest of less than 100 contracts, Ball said. CME does not offer a Canadian wheat contract. ICE could also capture business from traders who are hitting up against U.S. limits for positions in the grain markets. Some large agricultural funds take on positions in the three U.S. wheat markets - CBOT, Kansas City Board of Trade and Minneapolis Grain Exchange - to get around position limits. However, there is only one U.S. corn market, which is at the CBOT. "As we understand the rules, the position limits in the grains are specific to each exchange," said Sal Gilbertie, president of Teucrium Trading, which runs the $64 million Teucrium Corn Fund. "You see wheat trading on three different exchanges, and people use that very effectively to spread around their positions." Gilbertie said the fund did not have immediate plans to trade at ICE and will "wait and see" how the new contracts perform. ICE shares were up 0.4 percent at $134.06 on Thursday afternoon, while CME Group shares were up 0.8 percent at $286.53. Link this Share this Digg this Email Reprints

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