CME Group Business Action Plan

To: Phupinder Gill CEO

From: Scott Russell
Subject: CME Group
Date: February 2, 2015
CC: Jerilyn Willin
As a finance student who has a strong passion for financial markets and currently works
at CME Group, I have a good understanding of how the business functions. The first financial
exchange dates back 1791 in New York, where investors met at market places to negotiate the
buying and selling of stocks. In 1898, the Chicago Butter and Egg Board opened its doors to
members, where it was the first commodity driven exchange (History of Trading, 1). Now, after
merging with three other exchanges (The Chicago Board of Trade, New York Mercantile
Exchange, and CME Globex), CME Group is the top ranked group of exchanges in the world by
contract volume and offers the widest range of products across all major asset classes.
CME Groups exchanges enable investors to trade futures and derivatives. The purpose of
an exchange is to provide investors with a regulated market place that connects buyers and
sellers of financial instruments, which are primarily used to offset or take on risk. The two most
common types of financial securities are equities (stocks) and futures. A future is a contract
between two parties that, when purchased by the buyer, guarantees the sale and delivery of an
asset from the seller. These assets consist of anything that holds value such as gold, corn, crude
oil, or even live cattle. A derivative is something that derives its value from an underlying asset.
The underlying assets for most all derivatives are futures contracts. A futures/derivatives
exchange differs from a stock exchange in the way that the investor is leveraged. On a stock
exchange leverage is 1:1. So in order to buy 1 dollar of stock you need to invest 1 dollar of actual
money. Futures/derivatives exchanges run on leverage up to 30:1, where a 30 dollar futures
contract only costs 1 invested dollar. The potential to make money is much greater trading
futures and derivatives, but with that comes the potential to have greater loses.
Their company mission is to lead with integrity, advance the global economy, and act
with ingenuity everyday. They carry out there mission through their core businesses, which are
running their exchanges, offering innovative new products for investors to trade, and through
their clearing house. The clearing houses purpose is to settle all trades made on the exchanges
and absorb all of the credit risk for the clients involved in trading the financial instruments.
Clients consist of institutional investors, retail traders, brokers, and banks (Cmegroup.com). All
clients must have a substantial amount of risk capital in order to trade on the exchanges due to
the leverage involved with trading futures and derivatives. The leading source of revenue comes
from their exchanges, the highest grossing of which is the New York Mercantile Exchange. CME
Groups only sizeable competitor is the Intercontinental Exchange (ICE). ICE does not offer
anywhere close to the amount of products as CME Group, which makes CME a leader in
future/derivative market places.
The hierarchical structure within CME Group is very similar to that of a standard
American corporation. The companies departments consist of marketing, technology, clearing
house, operations, operational risk, market analysis, and sales. Within each department, in order

of highest ranking to lowest, there is: department head, vice president, director, associate,
analyst, and intern. There are over 1500 employees at CME Group, it is suggested that everyone
go to or raise money for one company run charity event each year. The company holds multiple
different annual charity events in Chicago and New York, aside from the millions of dollars in
donations and sponsorships they give out every year.
Although I believe CME Group is a great company, there is always room for
improvement. None of my suggestions are internally related, but rather the direction I think they
should expand their business towards. The first suggestion that I have for them is to break into
new asset classes. Currently they are only offering energy, agriculture, currency, metals, interest
rates, and indices asset classes. Many investors would like to trade weather derivatives, but there
are very few trustworthy places to trade them. If CME were to offer weather products, then they
would capture a large portion of the market and make it safer for investors to trade.
The second suggestion I have for them is to break into spot markets. As of now all
contracts cleared through CMEs exchanges are contract based, and settled at the end of the day
during weekdays. In a spot market or cash market, markets trade overnight and on weekends.
Unlike futures markets, cash markets are settled instantly and have a low operational cost to
maintain them. Regardless of the money to be made, it would also benefit the economy from a
macroeconomic standpoint. Suppliers will anticipate that a well-functioning spot market is
coming up - where information about supply and demand is current. and so will price more
competitively early on (Rigoglioso, 5). If CME Group where to begin offering spot markets, the
entire economy would benefit from it by becoming more efficient. A reputable name such as
theirs would be reliable, unlike the many over the counter markets that currently offer them.
Overall, CME Group has a long history of providing investors with what they want so
they can effectively manage and take on risk. Their mission of commitment to innovation makes
me confident that it is only a matter of time before they continue advancing their product and
market offerings into the future.

Works Cited
"History of Trading." - FEC. N.p., n.d. Web. 02 Feb. 2015
Rigoglioso, Marguerite. "Stanford Knowledgebase." Stanford Knowledgebase RSS. N.p.,
15 Apr. 2007. Web. 02 Feb. 2015.
Links
http://www.cmegroup.com