CFTC staff sides with ELX on EFFs

On Friday the Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight sent a letter to the CME Group stating that the Commission disagrees with the CME position that exchange of futures for futures transactions (EFFs), which were approved by the CFTC this fall, would represent a violation of the Commodity Exchange Act (CEA).

In October the CFTC approved the EFF rule that was proposed by ELX Futures, a competitor to the Chicago Board of Trade’s (CBOT) U.S. Treasury futures complex, which is part of CME Group. At the time the CBOT issued a regulatory advisory that stated its rules would not permit the execution of EFFs, suggesting they are prohibited under the CEA.

The rule effectively would allow clearing members of both exchanges to transfer Treasury futures positions from one clearinghouse to another, allowing end users to utilize the more liquid CBOT markets for execution and move those positions into the Options Clearing Corporation, which serves as the ELX clearinghouse, through an EFF.

On Jan. 4, ELX, through its attorneys, sent a letter to the CFTC asking the Commission to take action to require the CBOT to accept EFFs.

The CFTC letter states that that the Commission’s approval of the EFF rule carries with it a finding that the rule is consistent with the CEA and adds, “Staff requests that CBOT further justify its Market Advisory Notice.”

In response to the letter, CME noted, "We have been assured by the Commission that CBOT's rules respecting block trading and improper trade practices remain in full force and effect and must be enforced. The Commission has not required CBOT to accept block trades that violate those rules or to accept block trades that otherwise violate CBOT trade practice rules. CBOT and CME clearing have not been directed to accept directions from ELX or any of its members to transfer open positions.” (Click here to see CME statement).

In a statement released today, ELX Futures CEO Neal Wolkoff said, “We commend the CFTC staff for its findings that EFF transactions are consistent with the requirements of the [CEA]. Any further effort by the CME to thwart the EFF Rule will carry with it an unbearable weight of anti-competitive intent."

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