The War of the Exchanges is Meaningfully Affecting the PFF ratio for Chicago Mercantile Exchange Group (CME), Caution; Subscriber Trade Alert for CME Coming Soon ...

CME Group Inc. (CME) said Tuesday that U.S. regulators haven't instructed the exchange operator to accept transactions that would shift business to a rival, and that antitrust laws don't require it to allow such trades.
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The statement follows a letter from Commodity Futures Trading Commission staff late last week that rejected the Chicago group's justification for barring transactions that could move contract positions to upstart market ELX Futures, or vice versa.
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CME and ELX have jousted for months over the issue, and a final decision from regulators is keenly awaited by the industry as it could open the way for so-called "fungibility", a move that could transform competition in the sector.
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The issue dates back to October 2009 when regulators approved ELX's Exchange of Futures for Futures, or EFF, rule that would let customers move Treasury futures between markets.
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ELX, a bank-backed venture that launched in July 2009, sees the rule as a way to weaken CME's domination of Treasury futures trade, where it accounts for 97.7% of the market.
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CME responded with a notice to members that so-called transitory trades are barred by the Commodity Exchange Act--but regulators have rejected that argument, saying that the CEA provides for similar transactions on other exchanges.
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CME shot back Tuesday, noting that the CFTC hasn't ordered it to accept EFF trades, and that the CEA lays out rules against "anticompetitive activity."
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"Antitrust laws do not require us to take action to enable new entrants to take advantage of our substantial investments in innovation and marketing through which we have developed deep liquidity, broad customer relationships and distribution networks and established a world-class central counterparty clearing systems," CME officials said in the Tuesday statement.
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ELX, in its own statement Tuesday, offered a different interpretation of the CEA and charged that CME was the one behaving in an anticompetitive fashion.
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"The CFTC's Core Principle 18, which prohibits an exchange from 'imposing any material anticompetitive burden on trading,' imposes a duty that is independent of the U.S. antitrust laws," ELX officials said in the statement. "If there truly were a market purpose--as opposed to an anticompetitive intent--to disallow the EFF, the argument would have been made already."
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CME's legal team is expected to respond to the CFTC staff letter in the next few weeks.
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Shares in CME recently were down 2.3% at $299.91, weighed by the EFF issue, which some in the market saw opening the way for tougher competition in the U.S. futures business.
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Kenneth Worthington, an exchange sector analyst with JP Morgan, wrote in a note to clients that if ELX ultimately triumphs in its quest for CME to honor EFF transactions, it could open a "back door into fungibility."
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Fungibility refers to the ability to put on a position at one exchange and remove it at another. It's allowed in U.S. stock and options markets, but not in futures, where the proprietary nature of contracts has allowed exchanges to maintain a hold over markets.
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ELX has sought to draw volume away from CME by launching lookalike Treasury futures contracts, and will continue to do so later this year, when it launches new products modeled on CME's Eurodollar futures, tied to expectations for inter-bank lending rates.
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-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com
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(END) Dow Jones Newswires
January 26, 2010 12:35 ET (17:35 GMT)
Copyright (c) 2010 Dow Jones & Company, Inc.- - 12 35 PM EST 01-26-10
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