CME Group Inc faces legal, regulatory and reputational damage from the failure of MF Global, Standard & Poor's said this week as it lowered the exchange operator's rating.
The downgrade is the latest blow for CME from MF Global, widening the impact of the collapse that shook confidence in futures markets and revealed hundreds of millions of dollars were missing from clients' accounts at the brokerage.
Credit-rating agency S&P warned CME's grade could drop again due to the bankruptcy.
"We could lower the rating on CME Group if legal and reputational issues take a long-term toll on its franchise and financial positions," S&P said.
CME, the world's biggest futures exchange operator, served as a primary regulator of MF Global, and the brokerage was one of the top facilitators of trades in CME's futures and options markets.
S&P lowered the long-term issuer credit rating for the company to "AA-" from "AA". The agency affirmed a short-term "A-1+" rating for the company.
CME, which operates the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange and Commodity Exchange (COMEX), said it was "pleased that our rating remains high, with only 21 companies in the S&P 500 achieving a AA- rating or better".
However, S&P said the potential long-term impact on CME from MF Global's failure represented an "unquantifiable risk overhang".
The exchange operator raised its financial risk by increasing protection to futures customers in the wake of MF Global's collapse, according to S&P.
CME has faced criticism from some customers who say it could have done more to protect them from MF Global's failure. Clients still have not received all their money back, and some have stepped back from trading.
CME last week said it would set up a $100 million fund to try to draw farmers and ranchers back to the market for what it called "bona fide" hedging. The exchange operator 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 guarantees do not present a significant financial risk to the company, amounting 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 said "it's not their sandbox to be out there guaranteeing customer funds".
Separately, 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 rose significantly in the fourth quarter. CME said it was "pleased with the growth".
The ratings downgrade recognizes that off-exchange business transfers some counterparty risk to CME, said Craig Pirrong, a professor and a director for the Global Energy Management Institute at the University of Houston.
"The whole narrative about the reason we should have clearing is that it essentially makes counterparty risk go away," he said. "It doesn't. It essentially moves it around, and some of that risk has moved to the CME. That's reflected in the lower credit rating."
Yet, MF Global's collapse was likely a bigger factor in CME's downgrade than the expansion of off-exchange business, said Michael Greenberger, a law professor at the University of Maryland. He was the former director of trading and markets for the Commodity Futures Trading Commission, the main U.S. futures industry regulator.
"I think what the credit agency is saying is if you can't get your old business right, what is going to happen to you when you start handling business that is seven times that which you already have," said Greenberger, referring to CME's growth in over-the-counter business.
CME last week said it earned $745.9 million, or $11.25 per share, in the fourth quarter, up from $196.2 million, or $2.93 per share, a year earlier.
Total trading volume fell 2 percent from a year earlier, although average revenue per contract rose 4 percent from the third quarter to 81.1 cents. The firm cited increased volume in higher-priced commodity contracts.