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(Updates with comment from CME spokesman, additional detail throughout.)
By Jacob Bunge and Ben Fox Rubin
Efforts by CME Group Inc. (CME) to devise new protections for futures-trading customers in the aftermath of MF Global Holdings' (MFGLQ) collapse have increased CME's financial and credit risk, Standard & Poor's Ratings Services said as it lowered its rating on the firm.
The ratings agency on Wednesday also warned of reputational damage to the futures industry and aired concerns around the company's growing profile in handling off-exchange derivatives transactions.
"The rating actions follow several instances of CME Group providing limited financial support to the trading customers of its defaulted clearing members," said Standard & Poor's credit analyst Charles Rauch in a statement.
CME is the world's largset futures exchange operator by trading volume and among exchanges bore the brunt of MF Global's late-October collapse. The New York broker-dealer was one of the biggest facilitators of trade on CME's futures and options markets and CME was its primary regulator at the exchange level.
S&P in its statement pointed to $600 million worth of financial guarantees offered by CME in November to hasten the return of billions of dollars in customer money frozen by MF Global's bankruptcy, as well as a new $100 million fund announced last week to protect farmers and ranchers that hedge commodity price risk on CME's markets.
S&P lowered CME's rating to double-A-minus from double-A, pushing the rating three levels below the coveted triple-A rating. The outlook is negative, reflecting S&P's view of the potential legal and reputational fallout from MF Global's bankruptcy. CME was put on watch by S&P for a downgrade in March.
Shares were recently up 2.4% at $282.64. The stock is up 14% over the past six months.
A spokesman for CME said in a statement that the exchange group remains happy with its rating, a level he said only 21 other companies in the S&P 500 currently enjoy.
"As we have said before, the protection of our customers and integrity of our markets are our primary concerns," CME's spokesman said. "Throughout the unprecedented MF Global failure, we have acted aggressively to speed the return of customer monies -- not because we had to, but because it was the right thing to do for our customers."
Last week, CME unveiled fresh efforts to rebuild confidence in its business, boosting its dividend and creating a new fund to protect farmers and ranchers that use its futures markets.
S&P said it gained some comfort from CME's placing financial safeguards for over-the-counter interest rate swaps, but was less comfortable with CME's expansion into credit default swaps, an area outside the clearinghouse's historical expertise. CME's spokesman said the company was pleased at its growth in the business, which is expected to pick up further under new rules required by the Dodd-Frank financial law.
-By Jacob Bunge and Ben Fox Rubin, Dow Jones Newswires; 212-416-3108; email@example.com
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