Two rival exchanges in the Treasury futures space could be set for a battle on the regulation front. On Oct. 13, NYSE Euronext and the Depository Trust & Clearing Corporation (DTCC) finalized their formal agreement to create a joint venture, New York Portfolio Clearing (NYPC), to clear interest rate products traded on NYSE Liffe U.S. NYPC would margin cash and derivatives markets in a single pot, rather than through existing cross-margining agreements. ELX, which launched trading of U.S. Treasury futures in July, sent a letter to the SEC on Oct. 28 objecting to NYSE’s filing of draft amendments to approve the venture. ELX says that filing the venture in a draft manner was an attempt to keep ELX or other exchanges from having a public opportunity to submit any objections to the SEC. ELX’s main objection is that the venture is anti-competitive.
“As it’s been announced, there’s an exclusivity period that will last through the point of operations and two years after the clearing venture becomes operational. We’re now a live futures exchange and therefore every day this goes on it’s keeping us from having a cross margining opportunity with a utility that is holding these cash Treasury instruments because the market is required by law to clear it with them. We’ve been very much disadvantaged by the delay,” says Neal Wolkoff, CEO of ELX. “If this is a straightforward business and there’s nothing to hide, then do it publicly.”
A spokesperson for NYSE Euronext would not comment on ELX’s letter to the SEC.
ELX has not yet received a response from the SEC. “[We’re] not sure what happens next. It’s probably going to be determined by whatever the NYSE does in its joint venture filings to seek approval to use this utility clearinghouse for a for-profit venture which excludes other competitors. That’s going to be very controversial and give a lot of pause to the regulators in policy implications,” Wolkoff says.
ELX reported 4% market share in two-year Treasury note futures and 5% in five-year Treasury note futures in October, with a total market share of around 3%.
“The end game for [ELX and NYSE] is to get fungibility,” says Paul Zubulake, senior analyst for Aite Group. “There’s an opportunity for new listed products that could come out of all the potential regulatory changes. There’s no way that anybody’s going to get any meaningful open interest percentage in Treasury futures and Eurodollars from the CME Group.”