It was nearly two years ago when ELX Futures L.P. proudly announced that the Commodity Futures Trading Commission (CFTC) had approved their exchange of futures for futures (EFF) rule.
It was a considerable victory for the upstart exchange because it would make it easier for end users to transfer their open interest to its clearinghouse from the CME Group clearinghouse or vice versa.
But as we noted at the time it takes two to tango and the rule would not hold much weight unless the CFTC forced CME Group to accept EFF trades. Given a chance to say whether he would compel the CME early in the controversy, CFTC Chairman Gary Gensler told Futures that he would let the issue work through the appropriate channels. That he did.
What ensued was an almost comical back and forth between CME Group lawyers and the CFTC with an increasingly frustrated ELX asking the Commission to take more affirmative action. CME Group claimed that EFFs were illegal wash and or fictitious trades. The CFTC staff concluded that they were not and CME came back with yes they are.
At one point we figured that that we could simply add “CFTC says no they aren’t” and “CME Group says yes they are” to previous stories and be done with it.
Not to make light of the controversy because there were real issues on both sides. Exchange for Risk (EFR) transactions usually involve two related but materially different products such as cash and futures Treasuries where there is a risk involved. It is hard to dispute that the sole purpose of EFFs was to transfer open interest. At the end of the day CME didn’t want that to happen, ELX did and the CFTC, while perhaps thinking it may be a good thing, decided to stop short of forcing it.
The Commission did, however, hedge its bet by stating, “It is possible that in the future, under a different set of circumstances, the Commission could conclude that an exchange’s prohibition of EFFs does not comport with Core Principal 18.”
It also reiterated its disagreement with CME Group on its position that EFF trades violated the Commodity Exchange Act and said the exchange could not characterize them that way.
While this particular battle is over, I have a feeling we probably have not heard the end of EFF trades.