2nd UPDATE: ELX Says It Has Proof CME Accepts Transitory Trades
November 04 2009 - 11:09PM
Dow Jones News
Startup exchange ELX Futures on Wednesday sent a letter to U.S.
futures regulators, charging that CME Group Inc. (CME) accepts
trades that move positions out of its clearinghouse--something CME
has said it forbids.
ELX is pressing the issue after getting regulatory approval last
month for a rule that would let market participants arrange to move
Treasury futures positions from CME to ELX.
The consortium-backed ELX is challenging CME's dominance in U.S.
Treasury futures trade, in which ELX claimed 2.8% of the market in
October, and the exchange sees the rule potentially bringing new
business to its markets.
In a letter to the Commodity Futures Trading Commission, a copy
of which was seen by Dow Jones, ELX Chief Executive Neal Wolkoff
included a screen shot of what he said was an example of so-called
transitory trades in crude oil futures, moving positions between
CME's New York Mercantile Exchange unit and
IntercontinentalExchange Inc (ICE).
A CME spokesman said late Wednesday that the trade in question
represented a so-called switch trade, an ordinary occurrence in the
company's energy markets.
"Since ICE uses CME Group settlements for our benchmark WTI
crude oil contract, customers need to switch into futures contracts
to gain convergence to the futures before expiration," the
spokesman said.
CME's legal department maintains that the Chicago-based exchange
operator isn't required by regulators to accept trades made for the
purpose of shifting Treasury futures positions to another
clearinghouse, under its authority as a designated contract market,
and that CME has a long-standing policy of prohibiting the sort of
transitory trades covered by the ELX rule.
CFTC Chairman Gary Gensler declined to weigh in on the issue
during an appearance in Chicago last month. CFTC officials said
they were reviewing the letter and had no immediate comment.
ELX's so-called Exchange of Futures for Futures rule, or EFF,
would let investors offset positions held at the two markets,
according to ELX, while helping traders avoid margin calls where
there is no market risk.
Market participants looking to do an Exchange of Futures for
Futures transaction would privately negotiate to buy and sell
contracts on two exchanges, then report the transaction to the
exchanges' clearinghouses.
"Our letter is a formal request for the commission to act and to
put the CME in its proper place, which is as a regulated entity,
not a regulator," said Wolkoff, ELX's chief executive. "This letter
is simply intended to provide additional information around which
that decision by the CFTC can be more thoughtfully made."
Wolkoff said he has spoken to market participants interested in
moving Treasury futures positions between CME and ELX.
But the prospect of disciplinary action has stymied any attempt
at doing such a transitory trade until there is legal certainty
from the CFTC, Wolkoff said. The screenshot was obtained from a
trader at Wolkoff's request, he said.
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117;
jacob.bunge@dowjones.com
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