CME says ban on ELX rule not anti-competitive

By Reuters
Posted Sep. 17, 2010 at 12:02 p.m.

CME Group Inc. told the Commodity Futures Trading Commission that CME’s ban on a type of trade that would help rival ELX Futures LP easily capture business from CME is not anti-competitive.

In a 70-page letter posted on the regulator’s website on Friday, CME asked the CFTC to reconsider its endorsement of so-called exchange for futures trades, or EFFs, repeating its view that there is no compelling reason for it to allow them.

CME and ELX have been engaged in a public spat on the trade for nearly a year, with ELX saying the practice would promote competition and CME saying it is only enforcing its rules against what it deems anti-competitive trades.

EFFs would help Wall Street-backed ELX by giving traders a simple way to move Treasury futures contracts opened at CME’s Chicago Board of Trade to the Wall Street-backed upstart.

The CFTC last month said it believed the EFF practice was sound and opened an antitrust probe of CME’s decision to ban it.

“CBOT’s enforcement of its rules cannot be the foundation for an antitrust violation,” CME said in the letter, the latest of more than a dozen on the subject between CME, ELX and CFTC. “CBOT is not organizing a boycott of ELX, denying its products or services or otherwise discriminating against any customers who choose to trade on ELX.”

CME’s lengthy letter comes as CFTC scrambles to write rules to implement the recently passed sweeping Wall Street reform law by next summer’s deadline. CME says the EFF practice not only has garnered zero customer interest but also runs contrary to congressional priorities.

Lawmakers passed up the chance to endorse EFF transactions in the law when they omitted them from a list of trade types exempted from competitive trading requirements in order to facilitate necessary linkages between markets, CME said in the letter.

“Congress clearly did not support non-competitive, non-transparent EFFs,” CME said. “Requiring CBOT to accept EFFs effectively allows ELX traders to leverage the liquidity developed by CBOT without providing acceptable compensation to CBOT, while also harming CBOT markets and subverting a critical element of competition among exchanges.”

Neal Wolkoff, who heads ELX, said the CME continues to use its muscle as the biggest U.S. operator of futures markets to keep out competitors.

“Without the EFF, customers receive whatever is available on the dominant market whether it is the best execution or not,” he said in an e-mail to Reuters.

“The futures marketplace is not appropriately served with a sole provider that is a potential single point of failure. We look forward to the prompt conclusion of the Commission’s review, and believe strongly that we will and should prevail.”

ELX, launched little more than a year ago, is owned by Goldman Sachs Group Inc. and JPMorgan Chase & Co., among others.

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