CME Insists It Doesn't Have to Accept Rival's ELX Trades

Discussion in 'Financial Futures' started by ASusilovic, Jan 27, 2010.

  1. Shares of CME Group Inc. fell 6.8% after a U.S. regulator issued a statement that could weaken the basis for the futures exchange operator's dominant market position.

    The Commodity Futures Trading Commission staff issued a letter that appeared to back a challenge to the CME's clearing rules that generally require that trades opened on the CME must be closed there.

    In October, upstart ELX Futures LP won CFTC approval for a type of trade that could allow its customers to open positions on ELX and close them out at the CME's Chicago Board of Trade. But CME warned its members it might reject such trades as "fictitious," raising the threat of disciplinary action.

    On Tuesday, the CFTC said the CME's interpretation that such trades might be unlawful was "unpersuasive." But CME shot back with a response that indicated it would continue to reject such trades.

    CME argues that its control of clearing helps ensure that the contracts will be paid in full at expiration. The rule can also reduce the amount of cash margin traders must put up against all their positions on the exchanges.

    Despite the CME response, its stock fell by $20.79, or 6.77%, to $286.20 in 4 p.m. trading on the Nasdaq Stock Market, as analysts said the CFTC action might weaken CME's market share in U.S. futures trading.

    "The ability to move contracts from one clearing house could begin to increase fungibility between clearing houses, one of the reasons there has been less pricing pressure on futures trading fees, and was one of the many reasons for robust valuations at global futures exchanges," said analyst Daniel Harris at Goldman Sachs Group Inc.

    The CME has a stock-market value of $19 billion, dwarfing stock exchange operators such as NYSE Euronext Inc. at $6.2 billion and Nasdaq OMX Group Inc. at $3.8 billion.

    Some traders and analysts had warned that market participants might be reluctant to establish positions on ELX, which offers lower commissions than CME on some contracts, out of concern that they might have difficulty getting the best price in closing the positions if its liquidity dried up.

    ELX offers futures on some of the CME's most active contracts, including two, five and 10-year Treasury notes and 30-year Treasury bonds. But since its launch in July, it has only gained a market share of about 7% in two-year Treasury futures, and even less in other contracts.

    A Justice Department review of financial-markets competition, conducted when CME acquired CBOT in 2007, noted that control exercised by futures exchanges over clearing "may be unnecessarily inhibiting competition" among exchanges.

    By contrast, options contracts traded on one exchange are "completely fungible with those traded on another," the same report said, and stocks can be sold on any exchange regardless of where purchased.

    ELX, supported by a consortium of Wall Street dealers and other trading firms, is the latest attempt to loosen CME's dominance in interest rate products, after efforts from Eurex, the derivatives unit of Deutsche Börse AG, and BrokerTec, another consortium effort, were ultimately unsuccessful.

    Write to Randall Smith at and Jacob Bunge at

    One more reason to leave CME for ELX. CME's behavior is simply ridculous.
  2. About time that the CFTC stood up for actual futures exchange competition.