UPDATE: US Regulators Approve NYSE-DTCC Clearinghouse Venture

The prospect of an intensifying three-way battle over the biggest U.S. futures market drew closer Tuesday as regulators approved a new clearinghouse venture that will allow NYSE Euronext (NYX) to challenge the dominance of CME Group Inc. (CME) in contracts linked to Treasurys.

NYSE Euronext said it could be ready to launch Treasurys futures by April in what could be the most significant challenge to CME's near-monopoly on the product since the abortive push into the market by Germany's Eurex earlier in the decade.

The Commodity Futures Trading Commission paved the way for the clash by approving NYSE's New York Portfolio Clearing venture as a derivatives clearing organization, allowing it to clear futures trades.

NYPC is a joint venture between NYSE Euronext and Depository Trust & Clearing Corp., the dominant clearing organization of U.S. equity and Treasury bond trading.

Clearing has proven to be a key battleground in the Treasurys market, and the NYPC venture aims to let traders pool collateral posted against transactions in U.S. government issues alongside positions in related futures contracts.

Walt Lukken, chief executive of NYPC and a former acting chairman of the CFTC, said in a statement that Tuesday's approval was "an important milestone in the transformation of the U.S. derivatives market towards a more open and competitive structure."

The venture still needs a sign-off from the CFTC and the Securities and Exchange Commission on proposed margining rules, designed to make it more efficient for investors to deal in government securities such as Treasurys and futures contracts designed to hedge anticipated movements in the value of those issues. Regulators are expected to rule on that proposal by late February.

When the facility opens for business, NYSE Euronext intends to introduce a slate of interest-rate futures that will compete with markets long operated by CME, which dominates trading in Treasurys and Eurodollar futures markets. Eurodollars are tied to the London interbank offered rate, or Libor, a global benchmark measuring the cost of borrowing U.S. dollars on the London market.

Such contracts represent a core market for CME, contributing 22% of revenue in the third quarter of 2010. The Chicago-based operator continues to expand the franchise, a year ago adding "ultra-long" bond futures that have ranked among CME's fastest-growing product debuts.

CME since mid-2009 has been fending off a challenge from ELX Futures LP, supported by a consortium of banks and private traders, which has listed copycat versions of CME's Treasurys and Eurodollar futures.

ELX said Tuesday that its share of the Treasurys futures market briefly hit a high of nearly 5% in early January. The exchange this week slashed trading fees in a bid to draw more business, and in November completed a second round of capital-raising from its investors.

Past challenges to CME's interest-rate futures business, including the push by the Eurex unit of Deutsche Borse AG (DBOEF, DB1.XE), failed to gain enough traction but prompted cuts in trading fees and squabbles over clearing mechanisms.

Analysts have been slightly more optimistic on NYSE Euronext's approach, given its novel approach to posting collateral. Goldman Sachs analyst Daniel Harris in mid-January raised NYSE Euronext shares to "buy" on anticipated growth in derivatives, driven in part by the NYPC venture.

Shares in NYSE Euronext climbed Tuesday, recently 2.3% higher at $32.55. CME shares were 2.6% higher at $316.50.

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

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