January 23, 2017 / 6:48 PM / 7 months ago

UPDATE 1-CME Group suspends trading in European cocoa contracts

(Adds CME comment, background)

CHICAGO, Jan 23 (Reuters) - CME Group Inc will suspend trading in all CME Europe cocoa contracts starting with the May 2017 contract, the company said on Monday.

The CME euro-denominated cocoa contract was launched on March 30, 2015, but volumes and open interest remained low and the new market never mounted a serious challenge to the dominance of the IntercontinentalExchange, which operates both of the most actively traded markets in the commodity.

The suspensions of the CME contracts take effect from the close of trading on Monday, CME said in a notice to customers. The March 2017 contract will remain available for trading and any open interest in that contract will be unaffected, according to the notice.

Supporters of the CME contract argued that a switch to a euro-denominated contract from ICE's sterling-based market would reduce currency risks for the leading cocoa processors operating in euro zone countries.

CME had also sought to capitalise on concerns that ICE's in-store contract did not always align closely with the physical market in Europe and dealers said that its free on truck (FOT) basis should correlate more closely.

Dealers said that ICE's sterling-denominated contract was, however, already firmly entrenched and there were concerns that there was insufficient liquidity in the comparatively small European cocoa market to support two rival contracts.

Furthermore, a significant proportion of the 2015/16 cocoa crop had already been hedged against ICE's sterling contract when the euro market was launched, which made it challenging for the new market in the early stages.

"Though the initial launch of this innovative product had very strong market support, its performance decreased over time," a CME spokesman said in an emailed statement.

"As a result, we have decided to suspend all cocoa futures and options contracts beyond April 2017."

ICE also operates a United States-based cocoa futures market that was never threatened by the CME euro-denominated contract. (Reporting by Tom Polansek in Chicago and Nigel Hunt in London; Editing by David Goodman)

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