UPDATE: CME Wins Out Over ELX In Rate-Futures Spat

CME Group Inc. (CME) has been cleared by regulators of engaging in anti-competitive activity in the huge U.S. rate futures market after a rival alleged it was being stymied by the world's largest futures exchange operator.

The review by the U.S. Commodity Futures Trading Commission, or CFTC, ends a two-year spat between CME and ELX Futures LP, a bank-backed platform that is challenging the Chicago group's dominance of contracts used to hedge against or speculate on anticipated movements in key interest rates, such as Treasury yields.

The CFTC decision has been eagerly awaited as a signal of competition policy in the sector, while CME's dominance is seen as more vulnerable after NYSE Euronext (NYX) moved into the rate futures market alongside ELX.

Richard Repetto, analyst at Sandler O'Neill, said the ruling was a positive for CME but cautioned that it "does not end the competition it faces from ELX and [NYSE]," though rivals have yet to make a large dent in its market share.

The CFTC said in a letter to CME that the Chicago company was not bound to allow clients to shift futures positions from its platform to ELX. The regulator said CME's vow to block any such transfers of trades did not violate derivatives market law, which the much-smaller ELX had long argued was anticompetitive.

"We are pleased to have the matter resolved," said a spokesman for CME Wednesday.

Neal Wolkoff, chief executive of the two-year-old ELX, said he was "disappointed and surprised" by the CFTC's decision, but added that his company had drawn trading business without the contested capability, which ELX had dubbed an "exchange of futures for futures" transaction.

New York-based ELX introduced the "exchange of futures for futures" concept in the fall of 2009 as a new transaction that would have let two parties carry out a trade designed to move interest-rate futures positions from CME's clearinghouse to the Options Clearing Corp., which handles trading on ELX's markets.

ELX promoted the idea as a way to give traders more flexibility over trading collateral. If allowed, some firms viewed the function as a way to do trades on low-priced ELX and then move collateral into CME's clearinghouse, taking advantage of other margin posted against trades in CME's stock-index and commodity markets.

CME blasted the concept as a form of "wash trading"--ficticious transactions that are barred from U.S. futures markets--and promised to take action against firms that tried the trade.

CFTC staff last August launched an antitrust inquiry into the matter, consulting with the U.S. Department of Justice as it weighed whether or not CME's refusal to allow the transactions constituted anticompetitive behavior under the Commodity Exchange Act.

While the CFTC ruled that CME's block on such trades was not anticompetitive, the regulators' letter left the door open for allowing other, similar transactions.

"It is possible that in the future, under a different set of facts and circumstances, the Commission could conclude that an exchange's prohibition of EFFs does not comport with [the Commodity Exchange Act]," the CFTC's letter said.

In March NYSE Euronext joined the chase for rate-futures business, supported by a new clearinghouse developed with the Depository Trust & Clearing Corp., setting up a three-way contest for trade in Eurodollar and Treasury contracts.

So far CME has maintained a 97% to 98% market share in the products, according to analysts' estimates.

Shares in CME Group were up 0.3% at $283.51 in midmorning trade Wednesday.

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

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