March 19, 2018 / 2:31 PM / 4 months ago

CME gets foothold in Black Sea with new-look grain futures

PARIS (Reuters) - Active trading in CME Group’s new cash-settled futures for Black Sea grain suggests the exchange may have found a way to tap into booming Black Sea export trade after an unsuccessful earlier foray in the region.

A man enters the CME Group offices in New York, U.S., October 18, 2017. REUTERS/Brendan McDermid

The derivatives, based on S&P Global Platts’ price benchmarks for Russian wheat and Ukrainian corn, have generated more than over 15,000 lots representing 750,000 tonnes of grain since their December launch, in stark contrast to CME’s illiquid Black Sea wheat contract <0#BSW:> with physical delivery dating back to 2012.

Record Russian wheat exports this season have cemented the role of the Black Sea region as a driver of global grain prices and trade.

CME’s new wheat futures <0#BWF:> are seen as having the biggest potential given Russia’s clout as the world’s largest wheat exporter, and they have so far generated over 14,000 lots traded compared to 1,400 for corn.

Ukraine is the world’s fourth-largest corn (maize) exporter.

The cash-settled system of the new futures is a draw for participants keen to avoid the constraints of physical delivery.

The possibility of off-screen block trades, meanwhile, has allowed CME to tap into existing over-the-counter (OTC) trading, with the guarantee of exchange clearing to remove counterparty risk.

Platts says its physical price benchmarks for Black Sea grain and Australian wheat already generated some 500,000 tonnes in OTC trading in the year preceding the launch of the Black Sea futures with CME.

“It’s a very good start,” said Arnaud Saulais of SCB & Associates, one of the firms brokering the new futures. “You’re seeing participants who didn’t want to trade OTC and are now starting to do these cleared swaps.”

Price assessments like Platts’, compiled using observed physical market levels, also appeal to traders who cite a weakening correlation between Black Sea prices and CME’s Chicago wheat <0#W:> and corn <0#C:>, or Euronext’s French-based wheat contract.

Euronext has said it is considering possibilities for developing Black Sea grain derivatives.

CME’s Black Sea futures, like its Australian wheat contract with Platts, offer the choice between striking bilateral block trades that are then cleared via CME Clearport, or trading via the Globex screen platform as with its flagship Chicago futures.

The exclusively block-trade activity so far has allowed CME to avoid the trap of inactive screen trade. But some argue it will have to capture screen trading in order to be a credible alternative to its Chicago grain futures with hundreds of thousands of lots traded daily, or Euronext’s tens of thousands.

“Right now, Clearport and block trades are doing the job,” said Matt Ammermann, commodity risk manager at INTL FC Stone, another brokerage handling the new futures.

“But to my mind it’s very inefficient. It should be all on the screen so everyone can react.”

Reporting by Gus Trompiz in Paris; additional reporting by Michael Hogan in Hanburg; Editing by Nigel Hunt and David Evans

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