CME risks federal probe over ELX dispute, analyst says


Derivatives exchange behemoth CME Group Inc. could face a federal antitrust probe if it does not accept trades from startup futures exchange ELX Futures LP, an analyst with Sanford C. Bernstein & Co., said Thursday.

“Given the Department of Justice’s hard-line stance on competition in the futures industry, we question the wisdom of CME starting down this road, since it risks opening the futures industry up to a more comprehensive, undesirable reorganization,” analyst Brad Hintz said in a note.

CME responded to the Commodity Futures Trading Commission’s Jan. 22 request for more convincing evidence on the CME’s position in the dispute. CME suggested the CFTC end its inquiry into CME’s market advisory opposing an exchange of futures for futures rule that ELX wants CME to implement.

ELX describes an EFF as a transaction in which an investor sells an ELX over-the-counter, or OTC, futures contract to another investor and then buys a CME OTC futures contract from that investor. An over-the-counter contract is distinguished from a standard, listed contract regularly traded on an exchange; the parties negotiate the terms.

“The Treasury complex at both CBOT and ELX are liquid markets and there is no legitimate reason to permit a non-competitive transaction without any economic substance that will cause sudden, inexplicable changes in open interest,” the letter stated. “Any trader with a position at CBOT in a Treasury contract can quickly and easily exit that position and reestablish it at ELX by simultaneously buying and selling at the respective exchanges on their electronic systems.”

Rick Riebman, an attorney at Dykema Gossett PLLC, said, “A large market share imposes some responsibilities to the marketplace, but an exchange is also entitled to provide reasonable limitations on access. How those two interests will play out here is unclear.”

The CME has faced federal scrutiny before.  In 2007, the Department of Justice examined the CME-CBOT merger on anti-trust concerns, but concluded the merger would not hamper competition.

“The evidence indicates that the two principal impetuses for innovation have been, and will continue to be, the prospect of winning business from the over-the-counter market and the potential to offer products that the OTC community can use to hedge the risk associated with its activities,” the DOJ said in 2007.

Shares of CME closed at $291.69 Thursday, down .47 percent from Wednesday’s close.

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