ELX Can Offer Futures Trades That CME Contended Were Illegal, CFTC Says

ELX Futures LP, the derivatives exchange owned by Wall Street banks and hedge funds, can continue to offer a type of futures trade that competitor CME Group Inc. contended was illegal, the Commodity Futures Trading Commission said.

The disputed trade involves U.S. Treasury futures and is known as an exchange of futures for futures, or EFF. 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 “wash trades” and hurt customers. Wash trades, which can be used to manipulate prices, are illegal.

“The Commission has reviewed the matter and has found that ELX’s EFF transactions are not wash sales and are consistent with Commission precedent,” the CFTC, which regulates U.S. futures exchanges, said today in a statement. The regulator also said CME doesn’t have to accept EFF trades done on New York- based ELX.

The CFTC “neither prohibits nor mandates the implementation of rules” regarding “the acceptance of EFFs,” the regulator said. CME Group said it would continue to prohibit the trades. Treasury futures are offered on CME’s Chicago Board of Trade, or CBOT.

“The Commodity Futures Trading Commission’s letter does not change CBOT rules, which clearly prohibit exchange of futures for futures transactions,” CME Group said in a statement. “CBOT will continue to prohibit EFFs, which would reduce transparency and price discovery in CBOT Treasury futures markets.”

CME Stock Rise

CME Group shares rose $2.98, or 1.2 percent, to $247.80 as of 11:49 a.m. in Nasdaq Stock Market composite trading. The stock has dropped 26 percent this year.

“The CFTC continues to affirm the rule’s legality but seems unable/unwilling to require CME to comply with it,” Ed Ditmire, an analyst with Macquarie Group Ltd. in New York, said in a note to clients. “We are far from certain” that the CFTC “will ever compel the CME to support the rule.”

If Treasury contracts can be moved between CME Group and ELX, an investor could close a position on one exchange and open it on the other. That 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.

Seeks Information

“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 Chief Executive Officer Neal Wolkoff said in an e-mailed statement. “ELX intends to vigorously pursue full acceptance of the EFF.”

The CFTC has asked CME for more information on the competitive aspects of its refusal to accept the EFF trades and hasn’t made any decision on those aspects of the dispute, it said today.

ELX “will assist the commission and its staff in any way to complete its antitrust review of the rationale behind the treatment of EFFs,” Wolkoff said.