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CME Group In 2019 Case Solution & Answer

CME Group In 2019 Case Solution

Introduction

The case is based on CME Group, which was founded in Chicago. It is considered as the world’s huge future market, where commodities are exchanged and so are the options on particular future contracts, strategic and management choices that companies might face. CME Group has originated from the oldest markets, such as: CBOT, NYMEX and CME. In exchange-traded contracts, the market traders contract to speculate the risks and prices in the future trends. CME Group has commercial and financial customers as well as retail traders. Nowadays, trade has been showing a significant growth in the market, with 4.8 billion annual trading contracts in 2018. CME Group plays an important role in defining the future aspects of the agriculture industry. Sincethe 1950’s, CME Group has been leading the agricultural market by developing a liquid market for agricultural products, which is based on agricultural production in the U.S. But due to the dynamic changes in the global market; CME Group is losing its competitive position. As the result of the China-US economic war in 2019; the U.S has lost its dominance on oil seed and grain production, which tends to affect the agriculture futures market. (ALVAREZ, 2019)

Question-1:

If proposals for a tax on trades turned into reality, how would CME Group’s customers react?

Proposal for a Tax on Trades

Proposal of tax on trades brings a change in the financial exchange markets. CME Group opposes the trade tax as it has the tendency to cause failures in regions where the business is operating. It tends to affect commerce and damage the business, because there wouldn’t be any revenue generation. Tax on trade will affect the agriculture production, customers, firms and economy of a country. The tax would have an impact on the transaction cost in both implicit and explicit ways, because of a decreasing volume of trade and assets’ lower prices. Due to a decrease in the trade at financial market; CME will have less revenues and it wouldn’t be able to achieve its target. Tax will increase the risk for investors due to the lower returns on investments. Tax on trade affects the capital cost and the hedge products. Hedgers will suffer more, because if tax is imposed and speculators offset the tax, then the hedgers would have to pay the tax itself. The tax on trade will reduce the liquidity, affecting the risk management as well.

Customers’ Reaction

Tax on trade will create a huge impact on the customers. CME’s customer base are financial institutions, investors, manufactures, central banks and major corporations. The framers and energy companies try to keep hedge risk and prices stable, but due to a sudden tax on trades, costs would increase and so would the products’ prices. As a result, customers will have to pay more for the product. Tax on trade will affect the frequency of buying and selling, as customers wouldn’t be able to buy and sell the products easily. The customers will negatively react to the tax on trade.

Adverse Effects of a Tax on Trades

Related to Customers

Big corporations and institutions always try to avoid tax payments. The buyers and sellers will be decreased in the market. Hedgers will not decrease the markets risk so easily because of the implementation of tax on trade. The customers’ wants will remain unattended because of a decrease in the disposal income.

Related to CME

CME will not gain that much profit from trading because of the change in the consumers’ buying behavior as they will purchase fewer products. The trade quantity will decrease, and many investors will shift to other markets and future investments will suffer. The commodities market will get affected as the money is made from volume, but if volume decrease so would the revenue, following which, CME would not be liable to pay the capital gains.

What should CME Group do to mitigate the adverse effects of a possible tax on trades?

In order to mitigate the risks associated with possible tax on trades; the firm must find ways to benefit its customers in other ways, such as: reducing premium percentages and allowing competitive pricing strategies to mitigate the risk of customer acquisition by the Chinese Exchanges. It should also be proactive for its customers in terms of delivery of information regarding the commodity prices and must continue the clarity and completeness of information at its four exchanges. In conclusion, it should continue managing and improving the ecosystem at its exchanges, to mitigate the risk of customer loss due to trade tax. (Ivashchenko, 2021)……………………….

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