Justice Department In Talks With CFTC On CME-ELX Rule Spat -Sources

The Commodity Futures Trading Commission has spoken with the Department of Justice concerning the futures regulator's antitrust inquiry into CME Group's (CME) conduct in running its Treasury futures market, according to people familiar with the matter.

The CFTC launched its own antitrust inquiry after rival start-up exchange ELX Futures LP complained that CME was refusing to open its Treasury futures market to new competition.

The spat centers on efforts by ELX to force CME to let customers move futures contract positions between the two exchanges, potentially steering some business away from CME, the largest futures exchange in the world.

Although the CFTC said earlier this month it plans to study the antitrust concerns raised by ELX, the Justice Department's interest in the matter previously hasn't been reported.

People familiar with the matter said the CFTC is still the primary agency in charge of the review. At this point, talks between lawyers at the CFTC and Justice Department have been informal, with the Justice Department providing some substantive advice to futures regulators.

It is unclear whether the Justice Department has any plans to launch its own separate probe or get formally involved in the CFTC's antitrust analysis. However, the department's attention to the issue underscores the importance of the CME-ELX debate, the outcome of which could have important implications for market competition.

It is not unusual for the Justice Department's antitrust division to offer its expertise to other agencies that are analyzing possible harms or impediments to competitive markets.

The Justice Department has approved two large acquisitions by CME that have cemented its position as the dominant U.S. derivatives exchange. However, its continued interest in CME has unnerved investors in the past.

In a February 2008 memo, the department said a separation of futures exchanges from their clearinghouses would help promote competition among derivatives markets. The memo sent CME shares plunging.

CME, which in July had 98.4% of the U.S. Treasury futures market in the U.S., has long defended the current framework. The CME argues its markets directly compete against internationally based exchanges that share the same structure.

A spokeswoman for ELX declined to comment. A CME spokesman didn't comment on this latest development, but he reiterated CME's stance that it is not required to accept futures positions from the rival exchange.

CME for years has had a stronghold over trading in Treasury futures contracts. Last year, ELX became the latest exchange to try to gain a slice of the Treasury futures business, following a string of failed efforts that included Brokertec and Eurex U.S.

Last fall ELX won approval from the CFTC for a so-called Exchange of Futures for Futures rule, or EFF. That rule would let investors make privately negotiated trades designed to shift Treasury futures positions between CME's clearinghouse and the Options Clearing Corp, which clears for ELX.

But CME quickly blocked use of the rule in its market, saying it was anticompetitive and would constitute illegal wash trades. Wash trades are prohibited transactions that give the appearance of trading activity, but carry no market risk and can lead to unfair pricing.

ELX asked the CFTC to intervene. Earlier this year, the CFTC released a letter challenging CME's legal justification for blocking the EFF trades, saying the transactions don't constitute wash trades. The agency has been discussing the matter with the two exchanges ever since.

Earlier this month, the CFTC gave the CME 30 days to justify its reasons for blocking EFF trades. The agency also said its staff is conducting an antitrust review of the matter.

The CFTC's analysis is not a classic antitrust review because the agency is not charged with policing violations of U.S. antitrust law.

Instead, the CFTC has the responsibility to determine whether an exchange's actions comport with core principles of the Commodity Exchange Act, including one principle that requires an exchange to avoid taking actions that could restrain trade or harm competition.

ELX accused CME of violating that principle when CME warned its members could face enforcement actions if anyone attempted to conduct an exchange of futures for futures transaction.

CME, meanwhile, has tried to turn the tables on ELX, saying the EFF rule is anti-competitive.

"Antitrust laws do not require us to take action to enable new entrants to take advantage of our substantial investments in innovation and marketing," CME said in January.

-By Sarah N. Lynch, Brent Kendall and Jacob Bunge, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

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