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UPDATE 1-CME Group fends off complaints over higher fees

BOCA RATON, Florida, March 14 (Reuters) - CME Group Inc , the world's largest futures exchange operator, is facing mounting criticism from brokers over fee increases that are set to raise costs for futures customers.

CME, which owns the Chicago Board of Trade, Chicago Mercantile Exchange and other markets, has been constantly meeting with brokers upset over the transaction and market-data fees that were announced in November, Executive Chairman Terrence Duffy said this week.

The number of meetings on the issue picked up this week during an annual industry conference in Florida.

"We're taking a very judicious look at how we're implementing this data fee and, not only the data fee, but the increase in general," Duffy said in an interview at the conference. "If we're missing something that we didn't see, we're listening to it. That's yet to be completely analyzed."

CME said on Nov. 12 it would begin charging fees to those who distribute its market data. The fees took effect immediately for new data users but could be delayed until 2015 for existing users who qualified for waivers.

The exchange operator also increased transaction fees this year for nearly all its major products as part of its first significant fee hike since 2009.

CME expected revenues from transaction fees to rise 2 percent to 3 percent because of the increases, Chief Financial Officer James Parisi said on an earnings call last month. He projected a "somewhat meaningful" revenue increase from higher market-data fees.

CME likely won't be able to expand profits as planned because customers will consolidate data terminals rather than pay the market-data fees, said Gerald Corcoran, chief executive officer of RJ O'Brien & Associates, the largest independent U.S. futures broker.

RJ O'Brien projected the increased fees would cost its customers several million dollars a year.

"We built our systems on the understanding, belief and agreement with the CME that we wouldn't be charged market-data fees for providing our customers access to the market, and they've pulled the rug on us," he said in an interview on Wednesday.

The market-data fees were overreaching and were "put together without significant consultation from their FCM partners," he said, referring to brokers known as futures commission merchants.

RJ O'Brien had two "productive" meetings with CME at the conference in Florida, including one that included representatives of other firms, Corcoran said on Friday. He said he was "encouraged that CME was open-minded to working with us and these firms to find a solution."

The Futures Industry Association, which represents brokers and exchanges, sent a letter last month to CME expressing concerns about the fees. It helped to arrange meetings on the topic at the conference this week.

Brokers said the increases were ill-timed because the futures industry was still struggling with the Federal Reserve's extension of near-zero interest rates. Low interest rates for years have eradicated hope of a rebound in a key source of income: interest on customers' margins. While most large brokers must pass on interest earned on collateral to their customers, smaller firms were able to retain most of that revenue.

Brokerage executives from Newedge USA LLC, Citigroup Global Markets and Rosenthal Collins Group LLC said during a panel at the conference on Thursday that their biggest challenge was managing costs.

"The reality is, as fees go up you're always going to get folks complaining," said George Simonetti, head of markets clearing and futures execution for Wells Fargo Securities. Higher fees from exchanges are passed "straight through to the client," he said.

Leslie Rosenthal, managing member of Rosenthal Collins and a former Chicago Board of Trade chairman, circulated a letter in November calling on CME to delay the fee increases.

CME said it had deferred from making substantial fee changes since 2009 to be "mindful to client impact during a challenging market environment."

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