UPDATE: ELX Calls On CFTC To Open Treasury Futures Market

U.S. regulators have been drawn into an ongoing battle between CME Group Inc. (CME) and the start-up challenging the dominance of the world's largest derivatives exchange in the Treasury futures market.

ELX Futures LP has asked the Commodity Futures Trading Commission to order CME to accept trades that would allow contract positions to be shifted between their respective clearinghouses.

CME has so far resisted accepting the trades, a move that ELX said blunts its competitive position.

ELX made its push this week in a letter to CFTC Chairman Gary Gensler. "We think it's absolutely clear that this is within the CFTC's power, and that for many reasons they need to execute that power," said ELX Chief Executive Neal Wolkoff in an interview.

The months-long disagreement is focused on the movement of Treasury futures positions between ELX and CME, which controls 97% of the market.

ELX, an electronic exchange launched last summer and backed by a consortium of banks and trading firms, is the latest challenger in a segment that a number of other exchanges have failed to crack over the past decade.

New York-based ELX secured CFTC approval in October for its so-called Exchange of Futures for Futures rule, or EFF.

The process would allow investors to negotiate transactions privately to shift Treasury futures positions from CME's clearinghouse to the Options Clearing Corp., which clears trades for ELX, and vice versa.

The idea, according to ELX, would allow investors to offset positions held at the two markets and help traders sidestep margin calls where there is no market risk.

CME officials have said the Chicago-based exchange operator doesn't have to accept such transactions, citing a long-standing policy of prohibiting "transitory trades."

In its letter to the CFTC, ELX said that CME's prohibition has had a "significant chilling effect" that has kept investors from trying to do an EFF trade.

"Indeed, no rational market participant would execute an EFF involving ELX when it has been advised that it may face enforcement action from CME Group, the dominant exchange in the marketplace," wrote Kenneth Raisler, a lawyer for ELX, in the letter.

Gensler has publicly declined comment on the matter. CFTC staff have been looking into it and recently met with ELX officials, who assert that CME would not be deprived of trading revenue by allowing EFF transactions and that CME permits similar sorts of trades in its energy markets.

"We're asking the CFTC to direct CME, by order, to permit the execution of EFFs in accordance with the rule," said Wolkoff. "They have that power and we don't believe that any additional rule-making on the part of CME or CFTC is required."

A spokesman for CME said that "we have shared our views with the CFTC and will continue to work with them on this matter."

A CFTC spokesman declined to comment.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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