* Euronext's wheat futures are price benchmark in Europe
* CME Group's EU plans tap into trade gripes about Euronext
* CME threat, IPO may shore up Euronext's incumbent role
By Gus Trompiz
PARIS, July 4 Euronext should be able to fend
off an incursion by CME Group Inc into the European wheat market
as long-awaited changes to its wheat futures and support from
new shareholders cement its advantage as incumbent operator,
traders and analysts said.
Euronext's Paris-based milling wheat futures
<0#BL2:> are a benchmark for the European market. Traded volumes
in the futures have grown rapidly in the past decade as
volatility in grain prices drew hedgers and speculators towards
derivatives, and as a boom in European wheat exports raised the
profile of the region on the world market.
This transformation has attracted CME, the world's
biggest futures exchange and owner of the Chicago Board of Trade
(CBOT), towards Europe in what is the biggest competitive threat
to Euronext's wheat market since its creation in the mid-1990s.
"Europe has become a hub for wheat production, with its very
consistent output. When there are weather problems in the world,
people fall back on Europe," said Thierry Pouch, head of
research at farming advisory body APCA in France.
"This has a major bearing on its derivative markets and
makes them an attractive target," he said.
CME last month confirmed it is considering either developing
its own western European wheat contract, or partnering with
Euronext, with a promise of more physical delivery points and
incentives to store grain.
The Chicago giant's pitch addresses one of the main
grievances about Euronext, that its model is skewed by the use
of a single delivery hub - a set-up suited to French grain
producers and not the market as a whole.
CME's message plays well with operators critical of slow
progress in adapting Euronext's contract to market changes.
Traders also hope competition would push down trading fees.
CME is set on Europe, as shown by its plans to launch cocoa
futures in London, and Euronext may face other rivals as law
makers push business currently done off exchanges onto regulated
INCUMBENTS HARD TO DISLODGE
Euronext, however, has a headstart as the entrenched
operator in a sector where new derivatives struggle to exist.
CME's Black Sea wheat contract <0#BSW:> is one of several
agricultural markets that have failed to take off.
Those who criticise Euronext's milling wheat market as too
French and too rudimentary in its specifications recognise that
simplicity has brought vital liquidity.
"More delivery points outside France and a more pan-European
view would be welcome. But the great advantage Paris has is the
liquidity. You know you will be able to sell and this is a major
plus point for the Euronext market," a German trader said.
Traded volumes of Euronext's wheat futures and options rose
from less than 500,000 contracts in 2006 to a record nine
million in 2012. This year, a crisis in grain exporter Ukraine
fuelled record weekly activity in March for Euronext's commodity
CME's scale is still far superior across agricultural
commodities with a million contracts traded daily, powered by
corn and soybeans. But in wheat Euronext is now a credible
alternative to the main Chicago wheat future <0#W:>, the world's
PROTEIN NEXT TEST FOR EURONEXT
CME argues that large players in Europe are accustomed to
using its products. But some traders say the delivery model
vaunted by CME is too much of a leap for European operators.
According to traders, CME is promising a system of storage
fees and certificates to encourage silos to participate and
ensure forward prices reflect the cost of holding grain.
The European market is also seen as too small for a newcomer
and some worry that a new wheat contract could do more harm than
"The worst thing would be to end up with two European
contracts," a futures broker said. "If investment funds see that
neither has liquidity they won't bother and will stick to the
Some traders say CME's contract move is a tactic in a
broader plan to take over Euronext's wheat business. But
Euronext's spin-off from IntercontinentalExchange, in which
shareholders were gathered to ensure European control, may
Terms of the Euronext IPO stipulated that a group of
European institutional investors took a 33.4 percent stake in
the market operator at a 4 percent discount to the IPO price,
designed to allay local regulators' concerns that the
pan-European bourse could be snapped up by another foreign firm.
CME has played down the potential for a takeover bid for
Euronext's wheat business, stressing the idea of a partnership
like the one it has with Bursa Malaysia, a benchmark for palm
oil prices. Yet Euronext has signalled its own international
ambitions in a cooperation agreement with China's Dalian
Commodity Exchange, another key oilseed venue.
Euronext's plans to launch in the year ahead a new contract
calendar and two new delivery points could also quell discontent
among operators just as CME is courting them.
Talks over adding a protein level in Euronext's wheat
contract, prompted by French efforts to raise grain quality for
export, will be a fresh test for the exchange.
"The market's basic wheat standard is evolving and the
future of Euronext's contract could be at risk if it lags
behind," another futures broker said.
(Additional reporting by Valerie Parent and Michael Hogan;
editing by Keiron Henderson)