Financial Regulatory Forum

U.S. regulator rejects CME stance on Treasury futures

By Reuters Staff
January 27, 2010

By Ann Saphir

CHICAGO, Jan 26 (Reuters) – U.S. regulators rejected as “unpersuasive” CME Group Inc’s decision to bar traders from moving their Treasury futures positions to upstart exchange ELX Futures by using a block-trade mechanism offered by ELX.

Shares of the world’s largest derivatives exchange operator skidded 6.8 percent on Tuesday even as it defended its stance. CME said the Commodity Futures Trading Commission had not moved to require it to accept so-called exchange of futures for futures (EFF) trades from ELX or its members.

The CFTC has made a formal request to CME to defend its policy further, and the CME is expected to do so in coming weeks.

“Antitrust laws do not require us to take action to enable new entrants to take advantage of our substantial investments in innovation and marketing,” CME Group said in a statement. It added it was confident the CFTC will agree after “full consideration.”

The CFTC’s Jan. 22 letter, which was made public on Tuesday, helped send shares of CME down to their lowest closing price since September.

ELX Futures LP — backed by Goldman Sachs Group Inc, JPMorgan Chase & Co, Bank of America and other Wall Street firms — has been trying to win a foothold in the lucrative market for Treasury futures trading since launching last July.

The upstart has had trouble gaining traction because traders are wary of using a market without an established pool of liquidity. Treasury futures trading at CME accounts for more than 95 percent of trading in the contracts worldwide.

Last year, in an effort to address liquidity concerns, ELX won CFTC approval of a mechanism that could enable traders to easily transfer trading positions between ELX and the much larger CME, which runs the Chicago Board of Trade.

CME fought back, saying that such a mechanism violated its rules. ELX appealed to the CFTC to clarify its stance, and last week the regulator did so in a letter addressed to CME’s general counsel that called CME’s arguments “unpersuasive.”

ELX CEO Neal Wolkoff said the letter supports his exchange’s position. “Any further effort by the CME to thwart the EFF Rule will carry with it an unbearable weight of anti-competitive intent,” Wolkoff said in a statement.

The next move appears to be up to CME, Sandler O’Neill analyst Richard Repetto wrote in a note to clients.

“In our view, this means that CFTC is not taking action. Instead, it is asking CME to provide more reasons justifying why it has rules blocking EFF trades,” Repetto wrote.

“We expect the exchange of letters between CME and CFTC to continue.”

(Reporting by Ann Saphir, editing by Matthew Lewis)

((ann.saphir@thomsonreuters.com; + 312 408-8592))

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