published Mar 15, 2018 3:52:36 PM, by Matthew Leising
(Bloomberg) —
To understand why CME Group Inc. wants Michael Spencer’s NEX Group Plc — and why Wall Street should care — look no further than one of the world’s most important assets: U.S. Treasuries.

NEX on Thursday confirmed a Bloomberg scoop that Chicago-based CME, a $56 billion trading giant, is considering an offer to buy the London-based company. NEX cautioned no deal may emerge from the talks. CME declined to comment.

Spencer’s firm — probably better known by its old name, ICAP — has a lock on electronic Treasuries trading: about 80 percent of a $14.5 trillion market. And it’s quite the business to dominate. Treasury prices affect everything from rates on mortgages and credit-card debt to how much banks charge to lend to each other.

CME already has a complementary near-monopoly: trading Treasury futures. Putting cash and derivatives trading under one roof at CME could save Wall Street banks and investment firms millions a year by vastly reducing the collateral they must set aside. And who knows how they’d choose to spend that money, but one option would be pouring it back into trading at CME.

It doesn’t stop with U.S. debt. NEX is one of the largest platforms for trading currencies. CME is huge in futures on the euro, pound, yen and others. More savings probably lurk in that overlap too.

Here’s how it works today: Anyone buying Treasuries through NEX has to post what’s known as margin to back their trades. If that trader also shorts a Treasury futures contract at CME, that’s a separate pile of collateral — more of that firm’s money tied up in a clearinghouse.

But if CME and NEX unite, the Treasury bond is the perfect hedge for the short position at CME. In other words, no additional collateral is necessary, letting them do more productive things with the money. The same applies to pairing currencies with their futures.

“The combination is one of the few transactions that could make a big difference in U.S. Treasury clearing,” said Jim Greco, a co-founder of Direct Match Holdings Inc., a Treasury-trading firm that was unable to break the banks’ dominance of the market. “There are a lot of margin efficiencies that could be achieved by a firm using CME to clear their cash Treasuries.”
CME used a similar explanation when justifying its acquisition a decade ago of the Chicago Board of Trade, a deal that helped make CME the huge player it is today in global markets. When the Chicago exchanges were separate, traders needed individual margin accounts at each market. That went away when they merged.

To contact the reporter on this story: Matthew Leising in Los Angeles at mleising@bloomberg.net To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net Nick Baker, Dan Reichl

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