The financial crisis that has blunted growth in CME Group Inc.s futures business also presents Chief Executive Officer Craig Donohue with the opportunity to seize a market worth up to $400 million a year in new revenue but hell have to outfox a powerful rival, overcome Wall Street distrust of Chicago exchanges and perform a nifty dance step with resurgent regulators.
Hell also have to be quick. Just last week, New York Federal Reserve officials were in Chicago checking CMEs progress in creating a new fund to guarantee trading in credit-default swaps, the insurancelike contracts that emerged as prime culprits in the credit meltdown. Fed officials also met with CMEs chief competitor for the swap market, IntercontinentalExchange Inc., Atlanta.
Mr. Donohue and Kenneth Griffin, CEO of CMEs partner, Citadel Investment Group, Chicago, expect their platform to be operational this week.
Mr. Donohue badly needs the new business. Trading at his firms two Chicago exchanges has grown only 17% this year, the slowest pace since at least 2002, and some analysts forecast declines next year. Third-quarter profit rose 3%, to $278 million. Meanwhile, shares of CME swung widely last month as investors tried to gauge its chances of success in the swaps business; starting Oct. 13, the stock slumped 43%, hitting a three-year low of $233.19 a share on Oct. 27 before recovering slightly. Late morning Monday, the stock was ahead 9.30, or 3.3%, to $291.45.
The challenge is unprecedented for CME, which has increased its profits and share price since its public offering in December 2002. It also comes at an important time for Mr. Donohue, 47, a dapper lawyer who drives a Bentley convertible. His employment contract is up at the end of next year.
Mr. Donohue faces a familiar foe: Intercontinental CEO Jeffrey Sprecher challenged CME in its bid to acquire the Chicago Board of Trade last year. Mr. Donohue won, thanks in part to CMEs ties with its crosstown counterpart.
But now, Mr. Sprecher has the connections. He formed Intercontinental eight years ago with the backing of Wall Street trading houses the very firms that control the $47 trillion credit-default swaps market and in the wake of Enron Corp.s demise, when energy traders sought a safer platform for oil and gas contracts. Thats exactly what credit traders and regulators want today.
Last week, Goldman Sachs, Citigroup Inc. and seven other firms signaled their support for Mr. Sprechers plan when they agreed to allow the exchange to acquire their clearinghouse, Chicago-based Clearing Corp.
The Wall Street firms have chafed at CMEs dominance in U.S. futures trading it controls 98% of that business since it acquired the Board of Trade, and they fear its ability to raise trading fees. Mr. Donohue faces an uphill fight against Intercontinental, said Craig Pirrong, a finance professor at the University of Houston who studies exchanges.