Exchange of futures for futures (EFF) transactions are legal, a point the CFTC reiterated in January to CME Group, and the regulator and ELX Futures are waiting for further justification for why such transactions should not be allowed.
The CFTC’s Division of Market Oversight in January sent a letter to CME Group stating that it disagreed with the Chicago Board of Trade’s “suggestion” that EFF transactions could not be permitted because they violated the Commodity Exchange Act (CEA).
The letter was in response to the CBOT Regulatory Advisory Notice issued in October stating its rules do not permit EFFs.
In its letter, the CFTC noted that the Commission had already approved EFF transactions and such approval “carries with it a finding that approved rules implementing those EFF transactions are consistent with the requirements of the CEA.”
It goes on to say the CBOT misinterprets the CEA and requests further justification for its Advisory, which views the transactions as illegal wash trades.
ELX CEO Neal Wolkoff says, “The letter was pretty strong. I take them at their word. If [CME Group] comes up with an argument based on some other justification based on anti competitive [intent] dressed up as a market rationale, it won’t fly.”
In response to the CFTC letter, CME Group stated, “The only prearranged trades which are accepted by CBOT are those permitted by Rule 526 (Block Trades) and Rule 538 (Exchange for Related Positions). If prearranged matching pairs of offsetting EFRPs or block transactions were executed without incurring market risk, CBOT’s prohibitions on wash sales and fictitious trading would be violated.”
CME Group added, “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.”
In a letter to the CFTC, ELX stated CME Group’s response was misleading and gave the impression that the threat of disciplinary action was still in force for someone attempted to use an approved rule. EFF transactions would effectively allow entities to move positions from one clearing house to another to offset existing positions.
Wolkoff says, “We hear from a lot of people who think [an EFF] would be an important position management tool. It is very important to our existing customers and also to potential customers.”
CME would not comment beyond its Jan. 26 statement on the CFTC position on EFFs.
“There is clearly a demand for it,” Wolkoff says, adding, “There are numerous reasons a market user would use the rule.” He explains an order may be offering 500 bonds and there is 350 bid on CME and 150 bid at ELX. The trader can fill the order at both exchanges and then move the entire position to one clearinghouse.
“There are no holes to it. It is a benefit to the customer that one of the competitors in the marketplace does not want,” Wolkoff says. He would not predict what the CFTC would do next but says, “This is something we believe will happen.”