Credit Where it's Due

Paulhac: It has not changed our business very much. CME Group made the decision to let CMA run independently, so even though we are wholly owned, we are a very independent subsidiary. We have our own board of directors and we operate independently from a financial standpoint, with our own P&L. This has allowed us to retain our strengths, which are our culture, nimbleness and ability to stay very connected to customers and develop products extremely quickly.

Generally-though not always-it is harder to do those things in a larger structure. From that perspective there has not been a lot of change.

On the other hand, CMA has been very active in some of the credit derivative-related initiatives of CME Group. We have spent a lot of time with our colleagues in Chicago on the clearing initiative, especially focused in the US.

IMD: With regards to CME Group's CMDX initiative to clear credit default swap transactions, how important is it to have a high-quality data source?

Paulhac: It is critical. And it is not just access to the data source, but also to the expertise, the know-how, the market connections and the customer contact. All of that has been a strong addition to CME Group. As CMA has been focused on the credit derivatives market since we were founded in 2002, we have built up a lot of expertise in the quantitative modelling required to compute valuations of credit derivatives and so forth. So our staff members have spent a lot of time with CME Group to facilitate knowledge transfer in those areas.

IMD: That includes the ability to extrapolate prices from certain points along the curve?

Paulhac: It is not just extrapolating prices. The core function of the clearing house is about risk management. This not only requires the ability to identify the right settlement prices-which by itself requires a lot of computational models to get right-but also requires an understanding of how to manage risk within this asset class.

IMD: So that means understanding the volatility of prices?

Paulhac: That's right. CME Group has come up with an extremely well thought-out and advanced margining methodology that is based on seven factors. It is not based purely on Value-at-Risk and has nothing to do with the models that are traditional to the futures products that it trades. It is specifically designed for the CDS market and the CMA team has been quite involved in that process. We were not the only ones working on it-it was a broad initiative involving market participants, partners and customers-but the CMA expertise was valuable in that process.

IMD: Is the initiative to standardize quoting conventions also something that has affected your business?

Paulhac: Absolutely, although CMA has been more of an observer than an actor in the standardization process, which has been driven by the industry. But what we had to do was work with our customers to effectively adjust all of our services. All of our calculations and all of our information had to become compatible with the new way of quoting.

IMD: Did you have to convert all your historical data?

Paulhac: We converted our historical data, our QuoteVision product, our analytics and our DataVision product. Every single vendor that is servicing the CDS market has been dealing with the initiative to standardize quoting conventions. It is not specific to CMA.

IMD: There was also an initiative announced by CME Group, via a partnership with Citadel, to trade CDSs electronically. Would you be able to say what the impact of that initiative, if successful, might be on CDS market data?

Paulhac: The CMDX initiative is very much focused on clearing, but it does have an optional RFQ [request-for-quote] platform. So although the service is principally about clearing, if customers want to execute electronically they can do so via this platform.

But if you step back and look at how the credit derivatives market has adopted electronic execution historically, you will see that there has not been a lot of uptake until now. Most of the leading operators of fixed-income trading platforms have launched electronic CDS trading services in recent years, but they have failed to gain much traction.

IMD: What about the interdealer market?

Paulhac: There is some electronic trading in the interdealer market. But when you look at the volumes, the vast majority is in Europe. Our CDS initiative is primarily focused on the US market. If electronic trading is something that our customers want, then of course we have a solution to service them, but I'm not sure if that is their first priority.

IMD: So there are certainly caveats around whether electronic trading of CDSs will take off. But if it does, how will it affect market data?

Paulhac: If electronic trading does pick up, it could commoditize the value of some CDS data. But the reality is that there are probably between 1,200 and 1,800 entities that trade daily in the marketplace. Not all of those would be traded electronically, so the electronically traded entities would be a narrower subset of the total universe.

IMD: So would you say that data from electronically traded securities would be complementary to your existing data assets?

Paulhac: Yes.

IMD: At the time of the CME Group acquisition, there was also some mention of the complementary nature of your data and some of the other data assets contained within CME Group. Has there been any progress in integrating those?

Paulhac: We continue to develop an initiative that is very much focused on servicing the market using a much broader set of data. That would include credit derivatives, of course, but there are requirements to deliver similar functionality for other asset classes, which are the core expertise of CME Group.

IMD: Would that be distributed via a feed product, a display product or something else?

Paulhac: We will give you the details in good time.

IMD: Which other asset classes would be particularly complementary to CDSs?

Paulhac: I think the credit market is very specific and stands on its own. However, when we go to market with a wide-ranging offer that combines credit with interest rate, foreign exchange and other commodities data-the core strength of CME Group-then it makes the offer more attractive because it is broader.

IMD: You mentioned commodities. Are there any opportunities to use the set of technologies that you have developed at CMA for other asset classes?

Paulhac: We think there are opportunities. We have not fully explored them in detail at this time, mainly because the core principle of success in business is the ability to focus and execute. So we have been very focused on important goals and milestones to date, and focused on the OTC market. In the commodities space, we will be exploring whether we can leverage the QuoteVision technology in those markets.

IMD: For its ability to parse emails and structure that data?

Paulhac: The ability to parse emails, instant messages and any other strings of information.

IMD: Do you also have geographic expansion plans? How is the office that you opened in Asia gaining traction?

Paulhac: Fairly soon after we opened our Asian office we started to sign new business. When we look at our pipeline, it is extremely healthy. The process of closing contracts is very different and slightly lengthier, but we will still exceed the goals we had in mind for 2009 when we opened the office.

CEO Confidential

Name: Laurent Paulhac

Date of Birth: April 15, 1969

Hometown: Saint-Étienne

Education: Engineering at Columbia University

Current Home: Waccabuc, Westchester County, NY

Family: Married with three daughters aged 10, 13 and 15

Q. What book are you reading? A. The Power of One

Q. What album is in your iPod/stereo right now?

A. Whatever my daughters are listening to

Q. What was the last movie you watched?

A. The International

Q. Which sports team do you root for?

A. New York Knicks. I also enjoy hunting, golf, tennis and jet-skiing

Q. What are planning for your summer vacation?

A. Heading to Saranac Lake in the Adirondacks, NY

Q. What's your favorite city or place to visit?

A. South Island, New Zealand

Q. What newspapers or magazines do you read?

A. The Wall Street Journal, Harvard Business Review

Q. What was your first paying job and how old were you?

A. Photographer at age 16

Q. If you could have dinner with any person, real or fictional, dead or alive, who would it be?

A. Teddy Roosevelt

Q. How much sleep do you get each night?