CFTC said to delay derivatives exchange rule opposed by CME

Rule would require 85% of a contract’s trading to occur on a central market

CFTC seal CFTC seal

May 3 (Bloomberg) -- The U.S. Commodity Futures Trading Commission will delay a final vote on a rule governing derivatives exchanges amid internal dissent that it may restrict CME Group Inc., owner of the world’s largest futures exchange, according to four people briefed on the matter.

The rule, proposed in 2010, sought to require at least 85 percent of a contract’s trading to occur on a central market. The agency will meet on May 10 to approve a series of other exchange requirements, the CFTC said. The commissioners will delay the provision setting percentage levels, said the people, who spoke on condition of anonymity because the rulemaking process is not public. Under the proposal, an exchange would be forced to de-list a contract if it didn’t meet the 85 percent level.

The proposed rule would restrict CME’s ClearPort service, which acts as a clearinghouse for swaps traded outside of the company’s central market, Chicago-based CME said last year. ClearPort, which generates the highest fees per contract at CME, allows energy swaps, for example, to be converted into cleared futures contracts. Clearinghouses reduce risk in trades by guaranteeing trades between buyers and sellers.

“The 85 percent requirement will significantly deter the development of new products by existing exchanges like CME Group, and likewise deter any new futures exchanges from being established,” the company said in a February 2011 letter to the CFTC. The proposed level would force many of CME’s energy contracts off the company’s exchange and onto different trading platforms or into the private bilateral market, CME said.

Steve Adamske, CFTC spokesman, declined to comment.

Adequate Trading

The commission proposed the threshold to ensure that there would be adequate trading in a central market to allow for price discovery in a contract. “The commission believes that the price discovery process in the centralized market is jeopardized where off-exchange transactions become the exclusive or predominant method of establishing or offsetting positions in a particular market,” the agency said in the rule proposal.

De-listed contracts could be traded on other types of trading platforms known as swap-execution facilities. The CFTC has yet to finalize rules governing those trading systems.

“It’s appropriate we delay this to have a comprehensive discussion of trading in futures and swaps,” Scott O’Malia, a Republican CFTC commissioner, said in a telephone interview.

Bloomberg News

--Editors: Anthony Gnoffo, Gregory Mott

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