CFTC hands ELX defeat on EFF issue

Nearly two years after an apparent victory, ELX Futures was handed a bitter defeat by the Commodity Futures Trading Commission (CFTC) when the Commission found that it “cannot conclude that CBOT’s Advisory Notice (regarding ELX’s Exchange of Futures for Futures rule) violates (the Commodity Exchange Act) Core Principal 18,” which involves antitrust considerations.

In October 2009 the CFTC approved ELX’s EFF rule, which would allow market participants to trade positions in two different Designated Contract Markets and affectively moves open interest from one clearinghouse to another.

CME Group had argued that the EFF was a contingent, transitory trade that was prohibited by its rules. It stated that the EFF transactions constitute wash and fictitious trading under the CEA.

What ensued was a back and forth battle of letters from attorneys of both ELX and CME Group with the CFTC consistently siding with the ELX position. In a January 2010 letter the CFTC staff advised CME Group that the CEA did not support its position and asked for further justification for its policy prohibiting EFFs. In August 2010 the CFTC noted in a letter to CME that it supported the previously stated position of its staff and directed its staff to separately analyze Core Principal 18.

After reviewing letters from both exchanges and other relevant material the CFTC sent the rule interpretation letter on June 16, which affectively ended the controversy by not requiring CME to accept EFF trades. It stated, “the Commission does not find an unreasonable restraint of trade or a material anticompetitive burden on trading on the contract market to be present.”

The letter added that it would be possible that under other circumstances, “the Commission could conclude that an exchange’s prohibition of EFFs does not comport with Core Principal 18.”

It also states that regulatory precedent does not support CME’s assertion that EFF trades are unlawful wash or fictitious trades and the exchange may not characterize them that way.

In the end we are back to were we started; EFF trades are legal but the CFTC won’t compel the CME Group to accept them.

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