Owned by several large banks, New York-based ELX is a
start-up rival to CME, offering interest rate futures. Exchange
of Futures for Futures (EFF) is a practice whereby a firm can
open a trade at one exchange and close it at another.
This could enable ELX to attract more trading because market
participants would know they could trade out at the reliably
liquid CME if ELX’s market proved too shallow.
CME, which owns the Chicago Board of Trade, the dominant
exchange for US Treasury futures, objects strongly to the idea,
seeing it as a way for ELX to free-ride on its liquidity.
The CFTC has issued a series of decisions on this dispute,
each time siding with ELX. Critically, however, it has still
stopped short of insisting that CBOT accept trades from
The CFTC’s letter on August 13 was a response
to a CBOT self-certified Market Regulation Advisory Notice
issued on October 19, 2009.
In that notice, CBOT objected to the CFTC’s
decision to authorise ELX participants to carry out EFFs. The
Chicago exchange said its rules did not permit the execution of
EFF transactions, that they were not supported by CFTC
precedent and that they were prohibited under the Commodity
Exchange Act and CFTC regulations.
The Commission said it had reviewed and rejected these
arguments. It does not agree that EFF trades, when used to
"solely liquidate and establish lookalike futures positions on
different designated contract markets, are wash or fictitious
Wash trades are banned, as they can be used to manipulate
The CFTC said that ELX’s EFFs were not
prohibited by the CFTC’s Core Principle 9, which
governs execution of transactions.
CME Group quickly insisted that the CFTC’s
letter would not change its policy.
However, the CFTC has now begun to review whether
CME’s behaviour is anti-competitive, under Core
Principle 18. It gave the exchange 30 days to respond to 12
areas of concern.
Neal Wolkoff, chief executive of ELX Futures, responded
vehemently: "We cannot think of any reason why the EFF
transaction does not benefit customer and market interests, and
believe that the CME Group is acting solely for its own
competitive interests in opposing the EFF. ELX intends to
vigorously pursue full acceptance of the EFF and will assist
the Commission and its staff in any way to complete its
antitrust analysis of the rationale behind the treatment of
The CFTC’s ruling on the competition question
may finally bring an end to this year-long dispute.
ELX Futures would be rash to assume the decision will go its
way – not every judgement in derivatives markets has
favoured the new entrant recently.
Although the issues were different and the case was decided
by courts rather than the regulator, it was the Chicago Board
Options Exchange that emerged triumphant in July from a four
year battle with the International Securities Exchange, which
wanted to be able to list options on the Dow Jones Industrial
Average and S&P 500 Index. The court upheld
CBOE’s contractual claim to exclusive rights to