April 11 CME Group Inc said on Wednesday it plans to launch an aluminum swap futures contract based on the Midwest physical premium, in a move to take advantage of a burgeoning over-the-counter market and compete with the London Metal Exchange's own swap products.
The swaps, which are designed for hedging in the physical market, are likely to capture a large OTC market in North America and could see the exchange take on the LME, which launched its own aluminum swaps in January.
Major North American aluminum consumers and traders already use OTC contracts based on an average monthly Midwest premium to hedge their purchases through their broker.
By clearing the business, they reduce their exposure to counterparty risk.
While there is not thought to be a link between MF Global's demise and the launch, it is timely given the large size of the collapsed broker's aluminum OTC swaps business.
Their OTC customers lost large sums of money due to their exposure when the world's largest commodity derivatives broker filed for bankruptcy protection in October last year.
The new swaps will be traded on the floor and cleared through CME Clearport from April 30, CME said in a statement.
The product comes two and a half years after the Chicago-based exchange delisted its illiquid aluminum futures in 2009. CME inherited the contract as part of its takeover of the New York Mercantile Exchange a year earlier.
Nymex launched its aluminum futures in May 1999, but the product struggled to win support given the popularity of the LME's own product, which grew to be considered the benchmark for global pricing.
The contract is based on the Platts aluminum Midwest U.S. transaction based index for spot price transactions of aluminum in the Midwestern United States, where a significant number of North American aluminum transactions are executed.