2nd UPDATE: CME Group Calls On CFTC To 'Terminate' EFF Inquiry

CME Group Inc. (CME) called on U.S. regulators to drop a probe into its decision to bar clients from shifting contract positions to and from a rival futures exchange.

The Chicago exchange operator said the Commodity Futures Exchange Commission had overlooked precedents in assessing the spat between CME and ELX Futures LP.

CME and ELX have jousted for months over the issue, and a final decision from the CFTC is keenly awaited by the industry as it could open the way for so-called "fungibility," a move that could transform competition in the sector.

CFTC officials last month rejected CME's justification for blocking the migration of trades with ELX, which launched last year in a bid to break its rival's near-monopoly in the Treasury futures market.

CME General Counsel Kathleen Cronin reiterated in a letter to the CFTC that its reasons for prohibiting the transactions are backed up by the Commodity Exchange Act.

Noting that a rule at one exchange is not necessarily binding at another, Cronin said that there is "no legitimate reason" for CME to allow transactions that do not have economic substance and that could make its markets more volatile.

ELX Chief Executive Neal Wolkoff said in a statement Wednesday that CME's response amounted to an attack on CFTC staff, and offered no new justification on CME's part.

The disagreement began in October 2009 when regulators approved ELX's Exchange of Futures for Futures, or EFF, rule intended to allow investors to shift Treasury futures positions among markets.

CME later told members that such "transitory" trades are barred by the Commodity Exchange Act--but the CFTC last month asked CME to further justify its rejection of such trades, noting the CEA provides for similar transactions on other exchanges.

In CME's latest response, Cronin cited an antitrust provision, writing that ELX's argument essentially obligates CME to allow the transfer of customer positions from CME's markets to ELX "to foster the growth of ELX's business."

"Contrary to ELX's contention, it is well-established antitrust law that a refusal to assist a competitor is not an unreasonable restraint of trade," Cronin said.

She added that CFTC staff overlooked their own precedent regarding so-called wash trades--transactions that carry no market risk--and pointed to a January CFTC enforcement action against similar practices in the natural gas futures market.

"ELX's goal is to move a long and short position between two clearinghouses without the assumption of any market risk," Cronin wrote. "There is no real transaction between the parties except an agreement to move open interest. This illustrates the very definition of a fictitious, wash trade under Commission precedent."

Allowing ELX's brand of EFF trades, according to Cronin, would hamper competition and undermine the CME's role in price discovery.

Wolkoff said the CME is wrong to equate EFF transactions to wash trades, and that he hopes "the CME will respect the earlier comments made by the CFTC and stop undermining the futures regulatory body."

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

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