RPT-CME tests support for cocoa contract to rival ICE -traders

Fri Apr 11, 2014 7:00am EDT

(Repeats with no changes to headline or text)

By Marcy Nicholson and Chris Prentice

NEW YORK, April 11 (Reuters) - The CME Group Inc, the world's biggest futures exchange operator, has canvassed traders in recent months about opening a cocoa futures contract to challenge its rival's grip on the niche $15 billion market, traders said.

Discussions about the viability of a cocoa contract that would compete with IntercontinentalExchange Group Inc are at an early stage, according to two traders whose companies have been approached by the Chicago-based exchange.

In the strongest sign yet that the exchange will push ahead with its plans, CME in Europe has invited around 20 companies to a soft commodity briefing in London later this month, where they are expected to present an overview of the proposed cocoa contract, one of the trade sources with knowledge of the meeting said.

"CME's investigating whether they should open a cocoa contract in competition with ICE," the trade source said, adding the exchange has met with all the "important players" to discuss the contract.

A CME spokesman declined to comment.

The move marks the latest sign of the exchange's ambitions to expand in agricultural markets in Europe, where it plans to launch a European milling wheat contract that will challenge ICE Euronext's Paris-based wheat market.

Europe is by far the world's biggest region for cocoa processing and chocolate consumption.

It would be the CME's first push into soft commodities, that include coffee, cocoa and sugar, since it hired two soft commodity experts in April last year. Both had previously worked for Liffe.

The cocoa futures market is small compared to other agricultural markets.

Cocoa futures open interest in both ICE and Liffe markets is just under 495,000 contracts, equivalent to nearly 5 million tonnes of beans, which is a fraction of the 1.4 million contracts, or 178 million tonnes, of CBOT corn.

Late last year, ICE scooped up London-based cocoa, coffee and sugar contracts through its acquisition of NYSE Euronext (Liffe) to operate alongside its New York-based markets.

The purchase gave the Atlanta-based exchange, which operates a U.S. dollar-traded futures cocoa contract, the larger NYSE Liffe cocoa contract that is dealt in British sterling. Many traders actively trade the arbitrage between the two contracts.

In sugar, it gained Liffe's white sugar and robusta coffee contracts, in addition to its relatively larger ICE raw sugar and arabica coffee contracts.

Europe is home to major manufacturers such as the world's biggest industrial chocolate manufacturer Barry Callebaut , Lindor chocolate ball maker Lindt & Spruengli and Nutella chocolate spread maker Ferrero.

When ICE bought Liffe, some traders said they were concerned about one exchange operating two of the world's main cocoa futures contracts, but ICE appears to have quieted these worries during the transition through several regulatory changes.

In March, ICE announced plans to introduce additional guidance on position management on Liffe cocoa and coffee markets, where current rules allow these markets to become artificially squeezed from time to time.

Traders said the proposed contract will either trade in the British sterling or the euro, but questioned if the cocoa market is big enough for three futures contracts, with their main concern being a lack of liquidity.

"We don't like to see liquidity split between several markets," said another trade source. "A number of companies they've targeted and a number of people have said they'd support it." (Editing by Josephine Mason and Grant McCool)