LONDON (HedgeWorld.com)--Man Group, the world's biggest hedge fund operator and a major futures broker, is buying 70% of Eurex's controlling stake in the U.S. Futures Exchange, currently known as Eurex US. It will pay $23.2 million in cash for the approximate 56% stake in USFE and inject $35 million in working capital.
At the close of the deal, expected to be in September, the futures platform trading business will be re-branded USFE. Man Financial, the wholly owned brokerage arm of Man Group, will share ownership with Eurex and around 18 financial institutions which hold about 20% of USFE.
Kevin Davis, chief executive of Man Financial, said it would look to dilute its stake to below 50% of USFE through the sale of equity in the partnership to hedge funds and other financial institutions. Eurex said it intends to retain a stake of approximately 30% in USFE.
The link-up is to focus on three areas. They include developing new products for the retail trading community in North America, Europe and Asia; drawing in hedge funds and financial institutions as partners and developing products for that segment; and opening the platform to financial institutions to launch new products in exchange for a share of the revenue generated.
"We expect to expand the derivatives market by reaching out to new customers," Mr. Davis said in a conference call. "We will be targeting retail investors and buy-side customers." Andreas Preuss, chief executive of Eurex, added: "In this cooperation with Man Group we believe we have found the ideal partner to serve this rapidly growing product segment."
The move marks a climb-down by Eurex, 50% owned by Deutsche Boerse, which has lost money on the U.S. unit since it was established in 2004. In the press briefing, Mr. Davis declined to forecast when the USFE would move into the black, but said it would not occur until at least the second year after closing.
Asked in the conference what new products would be created, Mr. Davis said: "At this point it would be inappropriate for us to describe them. We have identified gaps in the market in the retail and hedge fund space."
Asked how the new ownership structure could succeed where the previous one had failed, Mr, Davis said: "We have hundreds of thousands of retail customers and thousands of hedge fund customers. That puts us in a unique position to test new products and roll them out." He added that options trading would be considered "in due course ?? 1/2 subject to regulatory approval."
Mr. Davis said hedge funds would be attracted to invest in USFE on two grounds. "First, it is a good investment," he said. "Secondly, hedge funds are constantly looking for new trading opportunities and to be at the birth phase of new products will be advantageous."
Asked to provide an example of a new product, Mr. Davis said, "In general terms, OTC products which currently trade on a bilateral basis and which tend to be centrally cleared with counterparties.
"We've had general conversations with hedge funds in North America and Europe," he said. "We will have a bigger problem keeping funds out than getting them in."
He also said that an anti-trust case the USFE launched against the Chicago Board of Trade and the Chicago Mercantile Exchange would be ring-fenced with the U.S. arm of Eurex AG. "It will remain with them," Mr. Davis said. "It will not be transferred to Man Group."
He added that the new business structure would not result in job losses. "Staffing in Chicago will be stable," adding that expansion would result in additional jobs in the future.
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