by Mark Connelly Lower Fees As exchanges look for new ways to generate revenue, FCMs are more and more concerned about the level and number of fees exchanges could charge. Electronic trading was expected to increase efficiency and reduce the cost of trading. Ironically, it has done neither. In the U.S., FCMs must support both open outcry and electronic trading and, in some cases, customers are paying higher fees to trade electronically. Volume discounts, recently introduced by the Chicago exchanges, provide some welcome relief, but have become an operational nightmare to implement. In addition, total fees have increased due to newly introduced fees like product or system fees. Other new fees are customer service fees and Globex system fees. For example, the E-mini customers are charged a 50 cent per contract Globex customer service fee, a 39 cent per contract clearing fee and a 25 cent per contract Globex system fee. Even with the onset of electronic trading, clearing and related transaction fees for the Chicago Mercantile Exchange and Chicago Board of Trade continue to skyrocket. For the CME, revenues on transaction fees have jumped from $116.9 million in 1997 to $292.5 million in 2001. Total contracts traded for 1997 were 200.7 million compared to 411.7 million in 2001. Year-end 2002 contracts could reach 500 million which could put revenues as high as $325 million. If these projections are accurate, revenues will increase 178 percent on a volume increase of 150 percent. The introduction of volume discounts may slow the growth of revenues relative to volume and reduce average revenue per contract, as evidenced in the most recent CME filing with the SEC. More telling is the decrease in the rate of open outcry contracts over the past five years. In 1997 open outcry made up about 94.7 percent of total contracts versus 69.7 percent in the first half of 2002 and is expected to decrease further due to the trend in electronic trading. This trend will bring the U.S. exchanges more in line with their European counterparts that conduct all trading electronically. Like the CME, the CBOT has seen open outcry contracts decrease from 97.5 percent in 1997 to 79.8 percent in 2001. For year-end 2002, the total for open outcry contracts could drop to about 60 percent. In contrast, the electronic trading system a/c/e will reflect total contracts traded at about 40 percent of CBOTâs total volume for year-end 2002 compared to 2.5 percent electronically traded contracts in 1997. Revenues are increasing for the CBOT as many electronic fees are higher compared to open outcry trading fees. Also, total contracts have increased because more and more people are trading on the electronic system. U.S. clearing and exchange fees for both the CME and CBOT appear to be high relative to their European counterparts. The Eurodollar and S&P contracts on the CME trade for fees that are approximately six to eight times greater than their European counterparts, and the Bond contracts trade for fees that are approximately six times greater than their European counterparts. In addition to more complex fee structures and additional fees, the Chicago exchanges are changing the way fees are calculated and collected. The CME introduced the Exchange Fee System in July 2000 to provide FCMs with an online transactional viewing and adjustment facility to monitor clearing fees. These database systems represent a fundamental change in the way fees are computed and collected. While it offers significant benefits for big customers, early usage of the system has not been without problems. According to some firms, they were not prepared to use the system effectively, the system was not robust enough and large errors resulted. Firms complain that they have to hire additional staff to use and monitor the system which diminishes the value of the volume discounts. In response, the CME established an EFS Settlement Fund to refund overpayments. In 2001 there was a three-month policy that allowed firms to request adjustments for firm coding errors and account management errors. Since three months is such a short time, firms requested relief from the three-month policy, so the CME offered a one-time $5 million EFS Settlement Fund to address all claims by clearing member firms related to clearing and transaction fee adjustments for calendar year 2001. The fund applies only to validated clearing firm errors that occurred between January 1 and December 31. This year the deadline for submitting the claims letter and inquiry to the CME for specific Monthly Account Summary reports was August 15. CME was expected to provide the requested data by August 30 and firms must provide their detailed claims to the CME with all amounts validated by September 30. Of course, the firm has to pay a âfeeâ to recover its money. In a July 26 letter to the firms, the CME wrote that âall claims will automatically be reduced by 30 percent to cover costs of examining and validating claims and to reflect the fact that all potential claims fall outside the CMEâs current three-month EFS policy.â The CBOT is in the process of rolling out its Exchange Fee Invoicing System, which is similar to the CMEâs EFS. The CBOT announced amendments to Regulation 450.04, which previously specified that Exchange Service Fee adjustments for overpayments and underpayments may be required for periods of up to five years. Under revised regulations the adjustment period has been reduced to one year for firm requests for reimbursement due to overpayments, and to three years for exchange requests for adjustment due to underpayments. Electronic Trading Fees : US versus Europe ------------------------------------------------------ CME LIFFE eurodollar $1.44 euribor 45 pence S&P500 $2.28 FTSE 100 28 pence CBOT EUREX 10-year bond $1.39 schatz .20 Euros 5-year bond $1.30 Bobl .20 Euros 2-year bond $1.30 Bund .20 Euros Mark Connelly is a senior manager for American Express Tax and Business Servicesâ (TBS) Financial Services Group. Donelle Duvall, a manager at American Express TBS, assisted with the article. --------------------------------------------------------------------------------