CME plans European wheat futures to rival Euronext

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CME Group Inc, the world's largest futures exchange operator, is working on plans to launch a European milling wheat contract in a direct challenge to Euronext's Paris-based wheat market, several sources familiar with the matter said.

CME, which owns the Chicago Board of Trade, has presented to French operators an outline of a wheat contract which it hopes to launch before the end of this year, the sources said, speaking on condition of anonymity.

Asked to comment, CME's Managing Director of Agriculture, Tim Andriesen, said: "We regularly talk with customers and market participants about ways to help them manage their risk."

He did not elaborate.

The plan for a milling wheat contract forms part of a push by CME into the European market as it prepares to launch a London-based derivatives exchange next month.

"Ideally they said they would like to launch this year," one broker said. "They are trying to see if it is worth doing something and they won't unless they have backing of operators."

Driven by price swings in grain markets since 2007, Euronext's wheat futures <0#BL2:> have seen volumes rise steeply to make it a European benchmark and a credible counterpart to the Chicago Board of Trade, the world's biggest grain exchange.

Like Euronext's milling wheat futures, the proposed CME contract would be tied to the physical market in France, the European Union's top wheat producer and exporter.

But it would offer a wider choice for silos for delivering grain in a bid to improve market fluidity, the sources said.

Tough Sell

CME could garner support from any operators unhappy with Euronext's wheat contract and fees, but would still face a tough task, the sources said.

Euronext's use of a sole delivery silo, at the northern French port of Rouen, is blamed by some for creating volatility as operators can struggle to settle delivery of contracts, although Euronext plans to add another two port delivery points before the end of 2015.

CME's plan to offer a wider choice of delivery points would involve going beyond ports to use silos across northern France if it can get grain handlers on board, the sources said.

CME could also tap into any grievances over trading fees by offering lower rates than its rival, and regarding quality specifications by proposing a minimum protein level - 10.5 percent - unlike the Euronext contract, the sources added.

But getting new agricultural futures off the ground have proved extremely difficult, as shown by minimal volume in CME's own Black Sea wheat futures <0#BSW:> launched two years ago to target fast-growing Russian and Ukrainian grain markets.

Euronext's entrenched position in the French market would also be hard to challenge, especially as its plans to create additional delivery points, as well as a new delivery calendar closer to that in Chicago, may also quell discontent.

"The (Euronext) contract functions and has proven itself, even if it's not perfect," a second broker said. "It will be difficult to impose a second wheat contract. You can only have one sun in the sky, not two."

It was unclear where the CME contract would be legally based, but the possibility of it being listed in London or Chicago would deter operators reluctant to have to operate under different country regulations, particularly more onerous U.S. commodity market rules, the sources said.

A better route for CME to establish itself in the European wheat market would be to acquire the Euronext contract, they said, a scenario envisaged by traders since Intercontinental Exchange said it would spin off Euronext.

"The best solution would be for CME to buy the Euronext grain contracts listed in Paris," the first broker said.

Euronext, often referred to by its former French name of Matif, also operates rapeseed, maize (corn), malting barley and skimmed milk powder futures in Paris, and plans to add rapeseed meal and oil contracts later this year.

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