The battle between the CME Group and ELX Futures looked to get a lot more interesting in October when the CFTC approved ELX’s Exchange of Futures for Futures (EFF) rule, which would allow market participants to trade positions in two different Designated Contract Markets, basically swapping Treasury futures from one clearinghouse to another. But as they say, it takes two to tango and CME Group does not care to play along, claiming the EFF rule would be a violation of its rules.
The two exchanges squared off shortly after the announcement with a CME spokesman stating, “CME, as a designated contract market, has had a long-standing policy prohibiting contingent, transitory trades such as those described by the ELX rule.”
ELX shot back the following day, “EFF trades are not transitory or contingent trades… Further, CME has openly permitted transitory EFRP trades, as a matter of course.”
CME noted in a Market Regulatory Notice dated Oct. 19, “CBOT rules do not permit the execution of EFF transactions. ... A futures contract clearly does not qualify as a “corresponding OTC swap or other OTC instrument,” and CBOT rules do not and have never permitted a futures contract to be used as the related position component of an EFR (Exchange for risk) transaction.
The notice goes on to say, “A prearranged, matched pair of block trades that are executed for the purpose of moving a futures position from one clearing house to another are both contingent and transitory trades and, under CBOT rules, may not be employed to create or liquidate a futures position.”
ELX disputed the CME interpretation in a letter to the CFTC, stating, “The Rule Interpretation sets forth the purported right of the CME and its CBOT subsidiary to subject the CME’s clearing members to rule enforcement actions should they offer for clearing to the CME’s clearinghouse EFF trades that are executed and submitted in accordance with a duly approved rule. ELX maintains that once the Commission has approved a rule, an exchange using its rule enforcement powers as a self-regulatory organization does not have the authority to say that it will deny use of the rule by intended beneficiaries without first seeking reconsideration from the Commission.”
The one man who could shed light on this, CFTC Chairman Gary Gensler, would not say whether or not the Commission would compel the CME to follow the rule when questioned during the FIA Expo in Chicago this October. Gensler did say that he was pleased legislation regarding cleared OTC trades would require “Trading platforms [to] have open access on a non-discriminatory basis to clearing venues. That is important to promote competition,” Gensler said, while noting this was specific to the OTC swaps area.
“In a vertically integrated market like the CBOT was or CME is there is a lot of creativity and innovation that goes into establishing those products,” says MF Global CEO Bernard Dan, who adds that other exchanges, whether it was Brokertec, Cantor, Eurex or ELX shouldn’t be able to ride on that success. “I don’t want to see the value of centralized clearing be compromised because of a desire to create multiple execution venues. If ELX has value users will recognize that.”