Bloomberg News

CFTC Shouldn’t Allow Margin Rules to Aid CME Group, ELX Says

October 25, 2010

The U.S. commodity regulator shouldn’t allow proposed rules on margin offsets for futures and swaps trades to be used to cement CME Group Inc. (CME:US)’s monopoly in U.S. markets, according to competitor ELX Futures LP.

ELX, the derivatives exchange owned by Wall Street banks and hedge funds, said that a pending rule on so-called “portfolio margining” could be used to stifle competition in the $33 trillion market by allowing CME Group to block competitors from accessing trades in its clearinghouse to determine margins, according to a comment letter to the Commodity Futures Trading Commission dated Oct. 22.

“We strongly recommend that the commission should not adopt a portfolio margining regime unless it adequately protects the ability of other exchanges” and clearinghouses “to adopt different market mechanisms for position transfers,” New York- based ELX said in the letter. That “would protect against one exchange/clearinghouse from gaining further monopoly power as a result of a new statutory scheme.”

Portfolio margining would allow investors to post cash to back trades based on their total cash and derivatives positions, not just on futures positions in a certain clearinghouse. A trader who owns cash Treasury bonds and has a short position in Treasury futures, where profit is made when the price falls, would owe the clearinghouse less margin because the products offset each other from a risk perspective, for example.

Futures Exchanges

CME Group, the world’s largest futures market, which controls 98 percent of U.S. trading, and ELX are in an ongoing dispute over U.S. Treasury contracts in what’s known as an exchange of futures for futures, or EFF. Through an EFF, an investor could move Treasury contracts between CME Group and ELX, allowing trades entered into one clearinghouse to be closed with the same position being opened on the other clearinghouse.

Chicago-based CME Group has tried to protect trading in Treasuries, one of its biggest products, by telling the CFTC that the EFF transactions amount to illegal “wash trades.” CFTC has disagreed and said EFF trades are legal, though the regulator said CME Group can block the transactions.

ELX is concerned that if the CFTC allows futures and swaps to be margined as one overall position and trades can’t be moved between clearinghouses, the new rule will add to CME Group’s strength in the market, according to the letter.

EFF trades may be useful for adjusting margins, which are set based on net positions within a clearinghouse. Investors may want to offset a position in one market with a position in another, for example.

To contact the reporter on this story: Matthew Leising in New York at

To contact the editor responsible for this story: Alan Goldstein at

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