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CME Group to Exit Credit Default Swap, Frees $650M Capital

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CME Group Inc. (CME - Free Report) will exit credit default swap ('CDS') clearing business by mid-2018. The company will now focus on over-the-counter ('OTC') clearing services on interest rate swaps (IRS) and foreign exchange (FX). The transaction will free up $650 million as clearing member capital.  

CME Group will work toward ensuring participants to manage risks with ease by providing full clearing services. The company announced to waive fees on CDS clearing and enable major transfer of open positions, once it receives approval. Once exited, CME Group will dissolve CME Clearing’s CDS guarantee fund and return the amount of $650 million to CDS clearing members.

In its efforts to consolidate OTC clearing services, CME Group will unveil OTC FX options clearing by 2017-end, deliver cleared OTC IRS in Chinese yuan, Chilean peso and Columbian peso by the beginning of 2018 and expand capital efficiencies for OTC IRS and FX.

CME Group always remains alert to ramp up growth. As such, it weighs options operating leverage. Earlier in April, CME Group had announced intention to shut down London-based derivatives exchange and the clearing house — CME Europe and CME Clearing Europe — by this year-end. This business move was driven by customers’ preference to trade more via CME Group’s U.S. platform. Shutting down operations will result in annual savings between $10 million and $12 million as well as free up over $150 million capital.

CME Group’s organic growth remained robust, as reflected by its revenue growth story with a CAGR of 7.5% over the last three years (2014-2016). Shares of this Zacks Rank #3 (Hold) futures exchange have gained 20.5%, outperforming the industry’s increase of 19.4%  Efforts to expand and cross-sell through strategic alliances, judicious acquisitions, new product initiatives and a solid global presence should boost growth. The expected long-term earnings growth is currently pegged at 10.6%.

Stocks to Consider

Some better-ranked stocks from the finance sector are Atlas Financial Holdings, Inc. (AFH - Free Report) , Markel Corp. (MKL - Free Report) and Mercury General Corp. (MCY - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here..

Atlas Financial Holdings engages in underwriting commercial automobile insurance policies in the United States. The company delivered positive surprises in two of the last four quarters with an average beat of 57.94%

Markel Corp. markets and underwrites specialty insurance products in the United States and internationally. The company delivered positive surprises in two of the last four quarters with an average beat of 21.06%.

Mercury General Corp. engages in writing personal automobile insurance in the United States. The company delivered positive surprises in three of the trailing four quarters with an average beat of 1.06%.

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