CME Group fends off complaints over higher fees

BOCA RATON, Florida, March 14 Fri Mar 14, 2014 2:13pm EDT

BOCA RATON, Florida, March 14 (Reuters) - CME Group Inc , the world's largest futures exchange operator, is facing mounting criticism from brokers over fee increases that are set to raise costs for futures customers.

CME, which owns the Chicago Board of Trade, Chicago Mercantile Exchange and others, has been meeting constantly with brokers upset over adjustments to transaction and market-data fees that were announced in November, Executive Chairman Terrence Duffy told Reuters this week.

Meetings picked up this week during an annual industry conference in Florida.

"We're taking a very judicious look at how we're implementing this data fee and, not only the data fee, but the increase in general," Duffy said in an interview at the conference. "If we're missing something that we didn't see, we're listening to it. That's yet to be completely analyzed."

CME on Nov. 12 said it would begin charging fees to those who distribute its market data. The fees took effect immediately for new data users and could be delayed until 2015 for existing users who qualified for waivers. The exchange operator also increased transaction fees this year for nearly all its major products as part of its first significant fee hike since 2009.

CME expects revenues from transaction fees to rise 2 percent to 3 percent because of the increases, Chief Financial Officer James Parisi said on an earnings call last month. He projected a "somewhat meaningful" revenue increase from higher market-data fees.

CME likely won't be able to expand profits as planned because customers will consolidate data terminals rather than pay the market-data fees, said Gerald Corcoran, chief executive officer of RJ O'Brien and Associates, the largest independent U.S. futures broker.

RJ O'Brien met with CME at the conference in Florida to discuss the fees and projected they will cost its customers several million dollars a year.

"We built our systems on the understanding, belief and agreement with the CME that we wouldn't be charged market-data fees for providing our customers access to the market, and they've pulled the rug on us," Corcoran said in an interview.

The market-data fees are overreaching and were "put together without significant consultation from their FCM partners," Corcoran said. CME is listening to concerns about the fees, but appears "very, very firm in their policy right now," he said.

The Futures Industry Association, which represents brokers and exchanges, last month sent a letter to CME expressing concerns about the fees. It helped to arrange meetings on the topic at the conference this week.

Brokers say the increases were ill-timed because the futures industry is still struggling with the Federal Reserve's extension of near-zero interest rates. Low interest rates for years have eradicated hope of a rebound in a key source of income: interest on customers' margins. While most large brokers must pass interest earned on collateral back to their customers, smaller firms were able to retain most of that revenue.

Brokerage executives from Newedge, Citigroup Global Markets and Rosenthal Collins Group said during a panel discussion at the conference on Thursday that their biggest challenge was managing costs.

"The reality is as fees go up you're always going to get folks complaining," said George Simonetti, head of markets clearing and futures execution for Wells Fargo Securities. Higher fees from exchanges are passed "straight through to the client," he said.

In November, Leslie Rosenthal, managing member of Rosenthal Collins and a former Chicago Board of Trade chairman, circulated a letter calling on CME to delay the fee increases. CME said it had deferred from making substantial fee changes since 2009 to be "mindful to client impact during a challenging market environment".