S&P cuts CME Group rating due to MF Global risk

Standard & Poor's Ratings Services cut its rating for CME Group Inc on Wednesday, warning the exchange operator increased its financial risk by increasing protection to futures customers in the wake of MF Global's collapse.

The ratings agency said CME also faced increased risk from the sudden growth of its over-the-counter clearing business.

CME did not immediately respond to a request for comment.

"The rating actions follow several instances of CME Group providing limited financial support to the trading customers of its defaulted clearing members," S&P credit analyst Charles Rauch said.

S&P lowered CME's long-term issuer credit rating to "AA-" from "AA" and said the outlook for the long-term rating was negative. The agency affirmed a short-term "A-1+" rating for the company.

CME, which owns the Chicago Mercantile Exchange and Chicago Board of Trade, is the world's biggest futures exchange operator and was a primary regulator of MF Global before the brokerage filed for bankruptcy on Oct. 31.

The failure shook traders' confidence in the futures industry, as former MF Global clients discovered million of dollars they had held in accounts at the firm were missing.

CME audited MF Global shortly before its collapse and has faced criticism from some customers who think it could have done more to protect them. Clients still have not received all their money back.

S&P said its negative outlook for CME represents the agency's view of "the potential legal, regulatory and reputational fall-out" from MF Global's bankruptcy.

CME last week said it would set up a new $100 million fund to try to draw farmers and ranchers back to the market for what it called "bona fide" hedging activities. Some have reduced their trading activity because of their diminished confidence in the market.

CME in November approved a $600 million guarantee to speed up payouts from the trustee overseeing MF Global's bankruptcy.

The support "raises incremental risks that were not previously factored" into S&P's ratings for CME, the ratings agency said. On their own, the money amounts to only about six months of CME's free-operating cash flows, according to S&P.

Matthew Heinz, analyst for Stifel Nicolaus, agreed the support for customers represented "pretty small potatoes for CME." Still, he noted "it's not their sandbox to be out their guaranteeing customer funds."

Regarding CME's over-the-counter clearing business, S&P said it was nervous about the exchange's growing profile in credit default swaps because the products are "outside the clearinghouse's historical expertise."

The company's clearing volumes for over-the-counter interest rate swaps and credit default swaps grew significantly in the fourth quarter.