CME Group Inc (CME.O), the biggest U.S.futures market operator, plans to launch a European exchange in a bid to break the duopoly of NYSE Euronext (NYX.N) and Deutsche Boerse AG (DB1Gn.DE) and expand CME's customer base in the process.

The operator of the Chicago Mercantile Exchange, the Chicago Board of Trade and the New York Mercantile Exchange said on Monday it was applying to Britain's Financial Services Authority for approval to open a London-based market offering currency futures in mid-2013.

CME has stakes in several foreign exchanges, including in Brazil and Dubai, but London would be its first solo run in an overseas market. CME's new CEO, Malaysia-born Phupinder Gill, took the reins of the Chicago-based company earlier this year vowing an international perspective for the 164-year-old U.S. futures powerhouse.

"We're talking about a brand new set of clients that would not otherwise trade on CME," Gill said in an interview, referring to the targeted clientele for the proposed exchange. Although CME already offers currency futures in Chicago, "we are not talking about existing clients that are going to shift their business."

Gill said the plan is to add contracts tied to other assets at a later date, but suggested he would be cautious about any direct challenge to NYSE and Deutsche Boerse, whose exchanges dominate trading in European futures.

He declined to say how much the new exchange will cost CME, saying only the expense will be similar to that of any startup.

NYSE's Liffe and Deutsche Boerse's Eurex have more than 90 percent of the total world trading in some European contracts, including short-term interest-rate futures in London and bond futures in Frankfurt.

The threat of a monopoly, particularly in futures tied to rates, brought competition authorities to block the planned merger between those exchanges earlier this year.

"It's hard to take away liquidity from the incumbent," Gill said. He should know: CME last year listed its own versions of Liffe's short-term rates contracts, but has won few converts.

The CME's proposal is a major step up in its European expansion ambitions and follows a challenging two years in which the exchange known as "the Merc" has seen its flagship West Texas Intermediate (WTI) oil contract lose share to a London rival.

The IntercontinentalExchange Inc (ICE.N) saw trading volumes of its Brent contract in London surpass the CME for the first quarter on record between April and June of this year.

CME already runs a London-based European clearing house for swaps, which serves to deal with some of the risks of trading these complex derivatives. In May it lost a year-long takeover battle for the London Metal Exchange.

Robert Ray, CME's managing director of products and services, will become chief executive officer of CME Europe, the company said.

FUTURES REFORM

The CME's move is timed to benefit from regulators' moves to overhaul the region's derivatives business by encouraging competition in futures trading and standardizing the vast and largely unregulated over-the-counter (OTC) derivatives market.

European policymakers have proposed technical changes in areas such as clearing and the licensing of indexes to ensure that new entrants such as CME Europe can compete more effectively with incumbents.

Regulators also want to make large chunks of the $700 trillion OTC derivatives market, which is traded privately between banks and hedge funds, operate more like exchange-based products such as shares.

"There could be opportunities for the CME as the provider of clearing and trading services as regulators seek to push the market away from its current largely uncleared, largely bilateral, and largely voice-brokered model," said Richard Perrott, an exchange analyst at Berenberg Bank.

Regulators are keen to shake up OTC derivatives to tackle some systemic problems that arose after the collapse four years ago of Lehman Brothers, a big OTC trading bank.

The CME will likely have a fight on its hands as the incumbents aggressively defend their home markets, Perrott said.

"It tends to be difficult for new entrants to compete directly with incumbents in futures trading. The CME will need to offer something different in Europe, perhaps in terms of technology or clearing, and it is not immediately obvious what that will be."

CME has also been canvassing metals traders about the viability of an aluminum contract to rival that of the London Metal Exchange, which has dominated the $80 billion market for decades, industry sources told Reuters earlier this month.

CME shares dipped 0.2 percent to close at $53.99 on the Nasdaq on Monday.