CME: Resistance To ELX Rule Doesn't Raise Antitrust Concerns

CME Group Inc. (CME) has denied it is broaching antitrust rules by refusing to accept trades from a rival futures exchange.

The Chicago-based exchange operator also alleged that ELX Futures LP couldn't be relied upon to maintain liquidity in the Treasury futures sector during times of market stress, according to a letter sent this week to the head of the Commodity Futures Trading Commission.

The CFTC launched an antitrust inquiry after bank-backed ELX Futures LP complained that CME was refusing to open its Treasury futures market to new competition.

CME's response came this week in a 70-page letter to CFTC Chairman Gary Gensler. The agency has been drawn into a year-long battle between the exchanges over a new type of trade that would let investors move futures positions from one market to the other, challenging the CME's dominance in the Treasury futures market.

The Chicago exchange stressed that it's treating all of its customers fairly and hasn't discriminated against those using the ELX platform.

CME said in its letter to Gensler that it "is not organizing a boycott of ELX, denying its products or services or otherwise discriminating against any customers who choose to trade on ELX." It added that "enforcement of its rules cannot be the foundation for an antitrust violation."

Forcing CME to accept ELX's new type of trade would itself be harmful to competition, according to CME. It said this would allow ELX traders to rely on CME's liquidity during key periods when activity on ELX slackens.

CME said that liquidity in ELX-listed futures contracts tied to U.S. 30-year bonds "vanished" during the May 6 "flash crash". Similar patterns have arisen on ELX's markets at other times, including around the release of economic reports when market stress is high, CME said.

These patterns can make it more expensive for traders on ELX's markets to do business, because there are less bids and offers in the market with which to interact, according to CME.

New York-based ELX has promoted its new transactions - known as exchange of futures for futures, or EFF - as providing more flexibility when managing collateral posted against outstanding positions.

CME quickly moved to block their use on its markets, alleging that EFF trades violate its rules and would allow ELX to take advantage of the massive liquidity that the Chicago exchange has built up in its most popular futures products.

ELX has claimed an average 2.2% of the Treasury futures market since launching the contracts in July 2009, with the remainder held by CME.

ELX Chief Executive Neal Wolkoff on Friday accused CME of giving "lip service" to customers that are harmed by CME's continued resistance on the issue.

"We look forward to the prompt conclusion of the Commission's review, and believe strongly that we will and should prevail," Wolkoff said in a statement.

CME has sought to fend off allegations by ELX that its refusal to let customers move futures positions between the two exchanges via the EFF trades constitutes anticompetitive behavior in violation of the Commodity Exchange Act.

The CFTC last month said it was opening an antitrust inquiry into the dispute after ELX claimed CME was violating a provision in the law requiring an exchange to avoid taking actions that might restrain trade.

The Justice Department's antitrust division has informally spoken with the CFTC on the inquiry, although the CFTC remains the primary agency in charge, according to people familiar with the situation.

ELX has argued that CME violated the antitrust core principle in the Commodity Exchange Act because the Chicago exchange previously issued an advisory notice to its customers warning that it would take enforcement action if anyone attempted to carry out an EFF trade.

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

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