Chicago Mercantile Exchange Group: Handling $1 Quadrillion Annually. Here’s How They Do It


The Essential Guide
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What is the CME Group?

The CME Group operates some of the largest and most important commodities and derivatives trading exchanges in the world.

CME Group exchanges, on average, handle over 3 billion contracts worth about $1 quadrillion annually.

CME Group operates four exchanges:

  1. Chicago Mercantile Exchange (CME)
  2. Chicago Board of Trade (CBOT)
  3. New York Mercantile Exchange (NYMEX)
  4. Commodity Exchange Inc. (COMEX)

These exchanges offer trading in global benchmark products across all major asset classes including futures and options based on interest rates, equity indices, foreign exchange, energy, agriculture, metals, weather and real estate.

CME Group operates a global electronics trading platform that enables users worldwide to access markets in all of the products it trades.

It also operates CME Clearing, which is one of the world’s leading central party clearing providers for products traded in the over-the-counter (OTC) market.

Its huge array of products and significant role in clearing trades makes CME Group one of the most important global exchanges for commodities markets.

CME Group plays a critical role in bringing together individuals, institutions and companies that need to manage risk or seek to profit from taking on risk.

CME Trading Options

What Products Does CME Group Trade?

CME Group offers customers access to trading and/or clearing for nine different categories of products:

CategoryProductsTrading PlatformMarket Facts
Agricultural
soybean oil icon
CME Group offers futures and options on futures for agricultural commodities spanning six categories:
  1. Grains and oilseeds
  2. Livestock
  3. Dairy
  4. Lumber
  5. Softs (coffee, sugar and cotton)
  6. Biofuels
CME GlobexCME offers both financially and physically settled agriculture products.
Energy
Fuel Icon
CME Group offers futures and options on futures for energy commodities spanning seven categories:
  1. Crude Oil
  2. Natural Gas
  3. Refined Products
  4. Biofuels
  5. Coal
  6. Electricity
  7. Petrochemicals
CME Globex
  • CME offers both financially and physically settled energy products.
  • Energy products trade primarily on the NYMEX. Ethanol futures trade on the CBOT.
  • Equity Indices
    Indices Icon
    CME Group offers futures and options on futures for US, international and select sector indices.CME GlobexCME Group offers smaller-sized e-mini contracts on a variety of US indices.
    Foreign ExchangeCurrency Icon
    CME group offers futures and options on futures for the following currency groups:
    1. Majors
    2. Emerging Markets
    3. Cross Rates
    CME GlobexCME Group offers smaller-sized e-micro contracts on certain foreign exchange pairs.
    Interest Rates
    Interest Rates Icon
    CME group offers futures and options on futures for the following interest rate categories:
    1. Short-Term Interest Rates
    2. US Treasuries
    3. Swap Futures
    CME Globex
  • Interest Rate products span the entire U.S. dollar-denominated yield curve.
  • The most popular products include Eurodollars, US Treasury Securities, 30-Day Fed Funds and Interest Rate Swaps.
  • Metals
    Gold Icon
    CME Group offers futures and options on futures for metals commodities spanning four categories:
    1. Precious metals
    2. Base metals
    3. Ferrous Metals (iron ore, steel and scrap)
    4. Other (uranium)
    CME Globex
  • CME offers both financially and physically settled metals products.
  • Metals products trade on the NYMEX and COMEX exchanges.
  • OTC
    Stocks Icon
    CME clears interest rate swaps, credit default swaps, 12 foreign exchange non-deliverable swaps and 26 cash-settled forwards. CME ClearPortCME clearing provides real-time clearing with straight-through processing.
    Real Estate
    Real Estate Icon
    CME Group offers futures and options on futures for 10 regional-based real estate price indices. CME GlobexRegional indices benchmark the Case-Shiller metro area home price indices for residential markets in Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington DC.
    Weather
    Temperature Icon
    CME Group offers temperature-based index futures and options for several US and international cities.CME Globex
  • Products trade in degree-days, which is a measure of how much a day’s average temperature deviates from 65 degrees Fahrenheit (18 degrees Celsius).
  • Indices are available for eight US cities and two European cities.
  • How Can You Get Started Trading on the CME?

    Traders in can open an account at one of these regulated brokerage firms to trade commodities based on CME Group products:

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    CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

    How is CME Regulated?

    Commodity exchanges in the United States fall under the regulation of the Commodity Futures Trading Commission (CFTC). The CFTC mission is to facilitate “open, transparent, competitive, and financially sound markets.” The agency works to limit systemic problems and safeguard market participants, consumers and the general public from fraud, manipulation, and abusive practices.

    The CFTC has broad powers to enforce the laws and regulations that govern commodities trading in the United States, including the operation of CME Group.

    In addition, CME Group has a Market Regulation Department, which operates as a self-regulatory arm of the company. The job of this department is to conduct surveillance of trades, positions, accounts and markets and prevent violations of exchange rules and securities laws. The Market Regulations Department ensures that each of the Designated Contract Markets (DCMs) – CME, CBOT, NYMEX and COMEX – fulfills its individual self-regulatory responsibilities.

    How Does the CME Group Conduct Trading?

    The CME trading and clearing technology revolves around five platforms:

    1. CME Globex
    2. CME ClearPort
    3. CME Direct
    4. CME Pivot
    5. Elysian

    CME Globex

    CME Globex is the electronic trading platform that provides traders with connectivity to futures and options in all of the different asset classes. Traders can directly enter their orders, view the book of orders and get real-time pricing data. CME Group also allows outside developers to customize tools for CME Globex.

    CME ClearPort

    CME ClearPort is a complete set of clearing services for the OTC market. ClearPort clears more than 300,000 contracts daily across multiple asset classes. More than 17,000 users including commercial businesses, banks, hedge funds, money managers and clearing firms use CMEClearPort.

    CME Direct

    CME Direct is the front-end application that provides access to both CME Globex and CME ClearPort with a single interface. If a futures commission merchant (FCM) supports CME Direct, then customers of that firm can access the application.

    CME Pivot

    CME Pivot is an instant messaging platform that allows instant collaboration with other market participants over a secure network.

    Elysian

    Elysian Liquid trading system is a trading, matching and auction platform that allows participants in the OTC market to match orders for interest rate derivatives, credit derivatives, fixed income and commodities. The platform is used mostly by large institutions such as Inter-Dealer Brokers and exchanges.

    What Types of Memberships Does CME Group Offer?

    CME Group offers three types of memberships. Each of these memberships can be bought, sold or leased:

    1. Clearing
    2. Corporate
    3. Individual
    CME Membership

    Clearing Memberships

    Clearing members are carefully selected companies that stand behind all trades made through CME Group exchanges. These companies are highly capitalized and closely monitored by CME Group.

    Clearing members assume full financial and performance responsibility for all transactions executed through them and cleared by CME Clearing whether it is for the account of a customer, member, or their own account.

    Corporate Memberships

    These memberships allow qualifying firms to receive preferential fees on the products they trade within the CME Group exchanges.

    Individual Memberships

    These memberships allow individuals to receive reduced rates and lower fees on certain products. Individuals can apply and hold memberships at one or more of the four exchanges run by CME Group depending on the products they intend to trade.

    Traders can obtain details about the prices for membership on the CME Group website.

    What Are CME Group Margin Requirements?

    Market participants on CME exchanges have both initial and maintenance margin requirements for positions.

    Initial margin: This is the up-front payment made prior to initiating a transaction. Initial margin is a percentage of the trade price.

    Maintenance margin: After posting initial margin, a market participant is required to keep up maintenance margin, which is the amount of equity required to retain an open position.

    Speculative/non-member initial margin requirements for all products are set at 110% of the maintenance margin requirement for a given product.

    Hedger/member initial margin requirements for all products are set at 100% of the maintenance margin requirement for a given product.

    Traders can consult the CME Group website and search by exchange, asset class and product for the maintenance margin requirements for each product.

    What Fees and Charges Do CME Group Assess?

    Exchange fees for clearing and trading CME Group products depend on the membership plan and participation status of the trader. Fees also vary by product, volume, trading venue and transaction type. Traders can consult the fee schedule page on the CME Group website for specific details.

    What Market Data Does CME Group Make Available?

    CME Group makes several types of market data and licenses available to market participants:

    Real-Time Market Data

    CME Group offers real-time pricing data for interest rate, equity index, energy, agricultural commodity, foreign exchange markets and digital assets (e.g., cryptocurrencies). Traders can license real-time information including the following:

    • Current bid/ask and price quotes
    • Opening & closing ranges
    • High-Low Prices
    • Last Sale Prices
    • Settlement prices
    • Depth of Book
    • Open Outcry Information
    • Price Limits
    • Comprehensive, definitive settlement data
    • Integrated S&P, Dow Jones newsfeeds

    CME DataMine

    This service allows traders to access historical data and back-test trading strategies. Some CME historical data dates back to the 1970s.

    Derived Data

    CME Group offers a Derived Data Licensing Agreement (DDLA) that allows traders to use CME Group data to create

    What Educational Materials Do CME Group Offer?

    CME has a large library of educational resources to teach traders the derivatives and risk management business. The website divides the educational material into five sections:

    Market Fundamentals: This section covers the real-world factors that impact prices of futures and options.

    Learn About Trading: This section contains videos, articles, courses, research, analysis, and other materials for traders of all skill levels.

    Practice Trading: In this section, traders can use simulated trading programs to gain trading experience.

    CME Trading Tools
    CME Trading Tools

    Hedging and Risk Management: This section offers comprehensive materials on how to manage risk using futures and options. The section is divided into clearing and price risk management.

    Portfolio Diversification: This section covers managed futures and hedge fund trading strategies.

    Other supplementary educational resources for traders and clearing firms include:

    CME Institute: This online university has a huge catalog of courses traders can access for free.

    Glossary: This comprehensive dictionary of trading terms helps traders decipher the language of futures and options markets.

    Education Search Engine: This tool enables traders to search educational materials on the site by type of content, topic and product.

    Does CME Group Have Vendor Partners?

    CME Group works with many outside vendors that supplement the trading and clearing experience for participating members and traders. Traders can obtain a full list of these vendor partners on the CME Group website.

    History of CME Group

    The history of CME Group dates back to the mid-1800s in the United States. The US economy was expanding rapidly, and “manifest destiny” led to a population spread out over an increasingly bigger geographical area. Feeding the US population required organized and efficient markets for buying, selling and transporting foodstuffs to cities across the country.

    Forward Markets

    The demand for grains to feed people and livestock trade led to the establishment of commodities forward contract markets in the United States. Farmers in the Midwest would bring their crops to Chicago for storage prior to shipment to the East Coast. However, during storage, the prices for these grains might change for a variety of reasons. The quality of the stored item could deteriorate, for example, or demand for the item could increase or decrease.

    To allow buyers and sellers to lock in transaction prices prior to delivery, the parties created forward contracts. These contracts bound the seller to deliver an agreed-upon amount of the grain in question for an agreed-upon price at an agreed-upon date. In exchange for this obligation, the seller would receive payment upfront for the grains. These contracts are called forward contracts. In 1848, a group of brokers established the Chicago Board of Trade (CBOT), and by 1851, they began to trade these contracts on the exchange.

    Chicago Board of Trade Building
    Chicago Board of Trade Building – Image via Wikimedia Commons

    Futures Markets

    As more farmers began delivering their grains to the warehouses in Chicago, buyers and sellers realized that customized forward contracts were cumbersome and inefficient. Furthermore, they subjected the buyer to the risk of default by the seller. A group of brokers streamlined the process by creating standardized contracts that were identical in these terms:

    1. The quantity and quality of the asset being delivered
    2. The delivery time
    3. The terms of the delivery

    They also created a centralized clearinghouse to act as the counterparty to both parties in the transaction. This eliminated the risk of default that was present with forward contracts. By 1865, CBOT traders and merchants began trading these formalized contracts known as futures contracts.

    By the 1870s, futures markets were flourishing, and the CBOT constructed an octagonal futures trading pit for conducting open outcry trades. In 1898, the Chicago Butter and Egg Board, the predecessor of the CME, opened in Chicago.

    In the 100 years following the establishment of the CBOT, agricultural products remained the primary commodities traded on futures exchanges. In 1936, the CBOT added soybeans, and the 1960s CME introduced frozen pork bellies and live cattle trading. In 1969, the CME launched a silver futures contract, which was the first non-agricultural commodity.

    CME and Financial Products

    In the 1970s, new financial products began to take shape. The decision by the United States to end the pegging of the dollar to the price of gold produced a free-floating currency system. In other words, supply and demand, not artificial pegs, determined how much each currency was worth. In 1972, the CME launched the first financial futures contracts, offering contracts on seven foreign currencies.

    The idea of trading prices, as opposed to physical goods, eventually made its way to other markets. In 1981, CME launched the first cash-settled futures contract on the Eurodollar. Essentially, upon expiration of a cash-settled futures contract, the seller of the contact does not physically deliver the underlying asset but instead transfers the associated cash position. After regulators approved Eurodollar futures contract, exchanges began listing cash-settled futures contracts on traditional commodities.

    By the 1980s, futures trading expanded to stock market benchmarks such as the S&P 500.

    In 1992, the CME launched the first electronic trades on the CME Globex trading platform, and in 1997, CME launched mini-sized electronic futures contracts on the S&P 500.

    When Did the CME Merge With Other Exchanges?

    In the 2000s, growth, followed by consolidation in the financial services industry, led to the formation of the modern CME Group. In 2002, the CME listed on the New York Stock Exchange (NYSE) and became a public company. In 2005, the CBOT followed suit and went public on the NYSE.

    Traditional Trading Floor
    New York Stock Exchange – Image via Pixabay

    CBOT

    In 2006, CME and CBOT signed a merger agreement, and in 2007 formed CME Group Inc., one of the world’s largest derivatives marketplaces.

    NYMEX

    In 2008, CME Group acquired NYMEX, which added energy and metals trading to its offerings.

    Kansas City Board of Trade

    The Kansas City Board of Trade was founded in 1856, shortly after the founding of the city itself: at that time the Board operated as the frontier city’s Chamber of Commerce.

    The transition to commodity exchange was formalised in 1876, when it became apparent that the rapid increase in wheat production in Missouri and the surrounding states needed an institution to facilitate trading and despatch of the grain being produced. Its position at the confluence of the Kansas and Missouri rivers, both major trading waterways, made Kansas City the obvious choice to host this new exchange. KCBT has grew to become the world’s primary wheat exchange.

    In 2012, CME Group acquired Kansas City Board of Trade (KCBT) and added hard red winter wheat to its suite of products.

    Who Are the CME Group Executives?

    CME Group has a management team consisting of 11 officers and managing directors. Some of the key executives include the following:

    NamePositionInformation
    Terrence A. Duffy
    Terrence Duffy
    Chairman and CEODuffy previously served as Executive Chairman and President. He was President of TDA Trading, Inc. from 1981 to 2002 and has been a member of CME since 1981.
    Brian Durkin
    Bryan Durkin
    PresidentDurkin oversees the company’s Technology, Global Operations, Market Technology and Data Services, and International businesses.
    Sunil Cutinho
    Sunil Cutinho
    President, CME ClearingCutinho previously served as Managing Director, Deputy Head of Clearing and as Managing Director, Clearing Operations & Systems. In these roles, he was responsible for developing clearing solutions for listed and OTC derivatives.
    Julie Holzrichter
    Julie Holzrichter
    Chief Operating OfficerHolzrichtrer heads CME Group's Market Operations including the Global Command Center, which is the first point of contact for customers using CME Group's Globex electronic production systems.
    John Pietrowicz
    John Pietrowicz
    Chief Financial OfficerPietrowicz is responsible for oversight of the company's corporate finance, accounting, investor relations, treasury, real estate and procurement functions.
    Derek Sammann
    Derek Sammann
    Senior Managing Director, Global Head of Commodities & Options ProductsSammann heads the development, execution and management of CME Group's global Commodities portfolio, including the Energy, Metals and Agricultural business lines. He also globally leads the company's cross-asset class Options business.
    Sean Tully
    Sean Tully
    Senior Managing Director, Global Head of Financial and OTC ProductsTully is responsible for leading the development, execution and management of the company's global financial products portfolio, including interest rates, equities and foreign exchange, as well as its OTC cross-asset product strategy.

    Images sourced from: http://investor.cmegroup.com/investor-relations/management.cfm

    Further Reading

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