CHICAGO, Feb. 28, 2011 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, announced the creation of a new clearing membership class for interest rate futures allowing for significant margin offsets between CME Group Interest Rate futures and U.S. Treasury securities. The Financial Instruments Clearing Membership (FICM), which is expected to be offered by the end of the first quarter, will provide margin offsets of up to 65 percent to qualified firms that trade both U.S. Treasury securities and CME Group Interest Rate futures products.
"We are establishing this new clearing membership category to provide customers who trade both U.S. Treasury securities and CME Group's Interest Rate futures with greater capital efficiencies, enabling firms to trade cash/futures strategies in a highly cost-effective manner," said Bryan Durkin, CME Group's Chief Operating Officer and Managing Director of Products and Services. "With our interest rate complex open interest at 37 million contracts or $30 trillion in notional value, the new FICM membership provides a strong value proposition for our global customers who trade these products."
The FICM membership category leverages existing infrastructure of firms that are active in both the U.S. Treasury securities and CME Group Interest Rate futures markets. The new membership class combines the benefits of CME Group's deep, liquid Interest Rates futures markets with our industry leading risk management financial safeguards and proven track record of CME Clearing.
A number of trading firms, including Breakwater Trading, Endeavor Trading, Henning-Carey Proprietary Trading, and HTG Capital Partners, have tested and validated the FICM membership and are working with CME Group to become FICM members. A full CME clearing member must sponsor the FICM and act as the firm's facilities manager to transact in the U.S. Treasury securities market.
See a video of Derek Sammann, managing director of CME interest rate and FX products, talking about the new FICM here.
For additional information about the Financial Instruments Clearing Membership, visit: www.cmegroup.com/ficm
As the world's leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) is where the world comes to manage risk. CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate. CME Group brings buyers and sellers together through its CME Globex electronic trading platform and its trading facilities in New York and Chicago. CME Group also operates CME Clearing, one of the leading central counterparty clearing services in the world, which provides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort. These products and services ensure that businesses everywhere can substantially mitigate counterparty credit risk in both listed and over-the-counter derivatives markets.
The Globe logo, CME, Chicago Mercantile Exchange, CME Group, Globex, E-mini and CME ClearPort are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX and New York Mercantile Exchange are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. All other trademarks are the property of their respective owners. Further information about CME Group (Nasdaq: CME) and its products can be found at www.cmegroup.com.
CME-G
SOURCE CME Group
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Senin, 28 Februari 2011
Rabu, 12 Januari 2011
Eris Exchange Chief Executive Neal Brady Talks About Building A Swaps Futures Exchange From The Ground Up
Neal Brady has spent the last five months or so working to get the Eris Exchange up and running as the first swaps futures exchange created after Congress passed the Dodd-Frank financial reform bill ordering swap trades onto public exchanges. As the deadline looms on finalizing Dodd-Frank, Eris aims to be the venue of choice for clearing services to reduce systemic risk in the over-the-counter market. Thus far, the new exchange for interest rate swap futures has handled over $19 billion in notional value since trading started in August.
Q: How did you get involved with the Eris Exchange?
Brady: I was previously managing director and head of business development globally for the CME. While I was at CME I was very involved in a variety of initiatives related to OTC clearing and trading. After leaving CME to run a venture fund where I was involved with many of the Eris founding partner firms, we began discussing with CME the possibility of clearing an interest rate swap futures product as a way to broaden access to the OTC interest rate swap market and respond to the new regulatory environment. I've been in the exchange and derivatives business for a long time and founded a venture several years back called Liquidity Direct which was eventually acquired by the CME. A number of proprietary trading firms were involved in that earlier venture as well as founders and partners, and that's how I ended up being involved with Eris.
At Eris Exchange, we’re up and running with a product and clearing solution that is very much within the spirit and guidelines of the Dodd-Frank legislation. There is a lot of talk in the marketplace about what new cleared OTC products and platforms will look like a year or two from now. What distinguishes Eris is that we are operational today with a product that meets the Dodd-Frank guidelines for OTC clearing and trading while using the tried and true infrastructure of the futures markets and not forcing firms to cut over to new and untested ways of doing business and processing derivatives trades. Eris also opens up access to a market that hasn't traditionally been open to all. To trade in this market, it has traditionally required bilateral arrangements, ISDAs, lengthy OTC documentation procedures, and a willingness for each dealer to admit each customer, one by one, as an acceptable counterparty. At Eris, we have created a product that directly replicates - dollar for dollar - an OTC interest rate swap product, but it is cleared and so available to a much wider community – anyone with a clearing relationship with an FCM who also qualifies as an Eligible Contract Participant as defined by the CFTC.
The Eris swap futures contract is very flexible – you can trade at any coupon rate you'd like and at any maturity day out to 30 years. If you have a valid customer account with a futures commission merchant at the CME that has more than $50 million in capital, you're eligible to participate. So it's an open access model that replicates the OTC market. We are also applying to the CFTC to become a designated contract market (DCM), at which point the Eris contracts will sit in 4d accounts at the FCM. A 4d is the account class that traditional futures accounts sit in - so Eurodollar futures, Treasury Futures, etc. all sit in 4d accounts. Once we become a DCM, our contracts will sit in that same pool and then will be eligible for cross-margining at CME against Eurodollar and Treasury futures. That will be a big capital savings for users of our product and we’re very excited about it. Once that’s available, there will be an even more significant cost advantage and capital efficiency advantage to using our product. We expect to become approved as a DCM this year.
Last but not least, we are also promoters of increased transparency in the market, so we announced a technology partnership with State Street Bank who is providing a matching and trading platform for us. When we launch on the State Street platform early this year, you will see liquid quotes for 2-, 3-, 5-,7- and 10-year benchmark maturities in interest rate swaps-- two-sided, transactable streamed quotes from dedicated liquidity providers-- the founding partner firms plus others that have signed up to stream quotes as well. This liquidity will be available to any customer or front end provider that is connected to State Street’s global trading platform. We’re very excited about offering that to buy side users and others interested in accessing the market.
Q: So this is strictly swaps? You have no interest in trying to compete with, say, the CME Group on Treasury products?
A: No, we have no interest in that. We are here to tackle the OTC-cleared market with a unique futures product. We think the CME's core business is their core business and they are very good at what they do. CME is purely a clearing services partner for Eris and they have an open clearing facility. They are not an equity owner in the exchange. We are an independent exchange, but cleared through the CME, and we’re very happy to have them as our clearing partner.
Q: Who do you see as your main customers at the Eris Exchange?
A: The main customers are anybody who today is an interest rate swap user - asset managers, corporates, hedge funds, insurance companies, GSEs like Freddie Mac and Fannie Mae – anybody who is a participant in this market that wants to lay off or put on a position at the Eris Exchange. There is also a lot of interest from emerging dealer banks that don’t have the same ISDAs and bi-lateral arrangements that the top tier dealers have. We are targeting anybody who trades interest rate swaps today. Many of these participants will be required to do all their business - cleared - on the date that Dodd-Frank becomes effective. If Dodd-Frank becomes effective a year from last July, at that date many firms will no longer be able to trade bilateral standardized swaps; they will need to do them cleared, either on a DCM or on a SEF. There are a number of emerging SEFs, but we aim to be the benchmark interest rate futures venue that also fulfills the Dodd-Frank mandate. Lastly, we also think there are non-traditional users, who currently do not have access to these markets, who will come into the market once it is a cleared marketplace. These are the users who don't have the time, resources or back office expertise to set up ISDAs and bilateral arrangements with the dealer banks.
Q: Could you tell me a little bit more about these new users?
A: We think there are banks and a variety of other users that would like to participate in the interest rate swap market but don’t because it's too much of an operational burden to set up proper bi-lateral arrangements. In terms of market-making, there is a large community that would more actively make prices upon request or stream transactable prices if they had access to this market. These firms are not making markets today because they don't have access. Once you provide clearing, the issue simply becomes who can reliably provide the most competitive prices and significant size.
Q: It seems there is an awful lot happening right now in terms of OTC and swaps. Who would you see as your main competition? Do you have a first-in advantage?
A: We think it will be a very interesting couple of years as the industry migrates to cleared interest rate swap trading. There are a number of swap execution facilities (SEFs) that are in the early stages of being formed, and that are only waiting for the specific rules from the regulators on what it means to be a SEF and details on required trading platform protocols. Right now the CFTC has put out proposed rules for public comment and the market is waiting for the official rules to be published and the time line for implementation. The CFTC has recently proposed rules to describe how to register as a SEF and there are a number of initiatives and corsortia discussing the possibility of forming SEFs. So certainly we think there will be a number of SEFs out there. I think anybody who has seen markets develop would probably assume that there will be some sort of consolidation and aggregation. There will be a number of SEFs and liquidity pools that consolidate down to a handful of primary venues. What we aim to be is the primary benchmark futures market equivalent that exists alongside the major SEF platforms.
It's a very large market, and if we can get a meaningful percentage of that overall market we will definitely be considered a success. We think our futures product in all likelihood will be carried on a number of third-party front ends and put in front of major buy side firms -- along with prices from various other SEFs. The legislation mandates that swaps need to trade either on a SEF or a DCM and we believe the clients should be free to decide which execution and clearing venue most suits their needs.
We also think our unique contract design distinguishes us from the rest of the market as it fully “futurizes” the economic exposures of a standard, cleared OTC interest rate swap. We do that by embedding all of the economics of the swap into a single futures price that gets independently marked-to-market and settled every day. Periodic cash flows are accrued and paid on a daily basis and get reflected in the futures price. We only move cash via the daily variation margin process that is well-known to the futures industry. Our product design is novel enough that we have even filed for a patent on some aspects of our final settlement calculation that allows us to truly match the economics of a standard OTC swap dollar-for-dollar.
We passed $18 billion in notional trading the other day - which relative to the overall OTC rates market is small, but we've shown that trades can occur and get seamlessly processed by futures back office infrastructure. Customers can use their existing futures systems and are not required to implement any new modules.
Q: Could you give any examples of the early interest in the Eris Exchange and its products? Examples of how enthusiastic the financial industry is about your services?
A: In every major client segment, we have interested participants that are actively pursuing or testing this out and working with us. We have a number of major FCMs that have processed trades, and many more in the pipeline getting ready. On the end user side, we’ve had interest from all the major participant types including asset managers, insurance companies, corporate, GSEs, hedge funds and major proprietary trading shops.
We are up and running and are available to almost the entire CME FCM population, so we are unique, and that draws a lot of interest. Every one of the major client groups is actively looking at how they are going to respond to and meet the coming regulatory requirements.
Q: How do you see the exchange evolving?
A: Our product road map involves moving from spot-starting, dollar-denominated interest rate swaps to forwards, which is a big part of the market, and then onto swaptions (options on forwards). That will require a lot of organizational focus from the exchange and support from our clearing and technology platform providers, and we’re very busy at the moment executing on that roll-out plan. Beyond that, we could eventually move into different asset classes and other non-dollar-denominated products.
Q: What would be a rough time line for these other products?
A: We are actively working on a number of product fronts with our various partners and will come to market as we have agreed upon time lines for launch. Dollar-denominated forwards is the next product in the queue for us to launch.
Q: Does the public, or at least the investing public, have a better handle on the OTC market and how the market works, or will the OTC market always be on the fringe to the educated retail user?
A: We are certainly targeting an institutional user base and not the retail market. Even if it is centrally cleared, an over-the-counter interest rate swap is a product tailored to the institutional user. However, after the recent financial crisis, the educated retail market and even the general public has become much more aware of the systemic risk and the pitfalls of bilateral, over-the-counter trading. The general investor and the general U.S. taxpayer is now aware of the risks inherent in OTC derivatives trading and the importance of assessing risk exposures daily and not letting losses accumulate. One of the major lessons we can all take away from AIG and the financial crisis is that futures-style margining works very well, and the system works because there is an independent risk assessment made and money moves daily based on the settlement prices determined by the independent clearing house. So even if the retail investor will not participate in institutional products on Eris Exchange, I think in the post-crisis environment an educated investor or even general taxpayer can appreciate the role this product fills in the marketplace.
Now, do I think OTC products will come into the mainstream? Potentially, for other asset classes, but I don't think interest rate swaps will be a major area of growth in the near term for the retail market. Retail investors are much more involved in equities, metals, agricultural commodities and ETFs. Interest rate swap futures are a little more capital intensive and more of a customized product for institutional clients.
Q: Were you hoping to do something like you are doing now when you were in school?
A: I studied government and international economics in school, I got an MBA and a master’s in international affairs and I started my career at the IFC-World Bank (International Finance Corporation), so I worked heavily in emerging market finance.
I was based in the U.S., but traveled to Asia, Africa, Latin America. I did a lot of work around the world. Then I came back to Chicago, where I grew up, and worked at the CME in emerging market product development. I was involved in international market development and then worked at the CBOT in a similar area. At CBOT we provided international consulting to emerging market exchanges who wanted to set up their own derivatives exchanges.
I've been involved in markets and new market development from early on in my career, and then started Liquidity Direct, which was an options spread trading platform focused on the interest rate options market and supported by a number of major trading firms in the industry. After we were acquired by CME, I ended up running CME’s business development, working on things like CME’s investment in BMF in Brazil and a variety of OTC clearing initiatives.
So could I have predicted that I would be running an OTC interest rate swap futures exchange? No, that's based on the particular moment in time and the specific macroeconomic context today. But I've been involved in starting new product ventures, new exchange-type ventures my whole career. That's the logical progression. I moved from emerging markets to something more close to home, but it still involves opening up new markets and providing access to new products.
Q: Is there anything else that we haven't talked about that people should know about the Eris Exchange or its products?
A: I think the message that we haven't touched on is this is a very exciting time for the futures industry. The futures market performed extremely well during the recent financial crisis. It handled the Lehman default and bankruptcy without a hitch.
Whereas major players were having issues in the OTC market, the futures market was a stable source of liquidity throughout that crisis. I believe if the industry transition to cleared OTC trading occurs the way we envision, it will be a boon to the futures industry in general. This is a major shift in the futures markets and the capital markets in general, and it's a whole new world of opportunity.
It will ultimately result in a much better, more stable product for the current OTC end users. They get
transparency, they get independent marks, they get a more robust credit facility on the back end and they don't have to worry about balance sheet exposure. They get all the benefits they currently have and they remove a significant part of the risk.
Overall, it's a big win-win for everybody. And it will be a very interesting couple of years as this all plays out.
Selasa, 11 Januari 2011
CME Group Celebrates One-Year Anniversary of the Ultra Treasury Bond
CME Group Celebrates One-Year Anniversary of the Ultra Treasury Bond
Fastest Growing Interest Rate Product Ever Launched
CHICAGO, Jan. 11, 2011 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, today marked the one-year anniversary of the Ultra Treasury Bond contract. The contract, which is listed with and subject to CBOT rules, is the fastest growing interest rate product ever launched by the CME Group exchanges.
Robin Ross, Managing Director of Interest Rate Products, and Jonathan Kronstein, Associate Director of Interest Rate Products, discuss the one-year anniversary of the Ultra Bond contract here.
The Ultra Bond was launched on January 11, 2010, in response to strong customer demand for a contract that mimics the duration of a 30-year Treasury bond. Milestones include:
Nearly 4,500 contracts changed hands on its first day of trading;
First quarter average daily volume surpassed 14,000 contracts;
Fourth quarter average daily volume exceeded 52,000 contracts;
On November 24, the Ultra experienced record volume of 349,000 contracts traded, and record open interest of 380,000;
As of December 31, open interest was more than 307,000.
For more information about the Ultra Bond, please visit www.cmegroup.com/ultra.
As the world's leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) is where the world comes to manage risk. CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate. CME Group brings buyers and sellers together through its CME Globex® electronic trading platform and its trading facilities in New York and Chicago. CME Group also operates CME Clearing, one of the largest central counterparty clearing services in the world, which provides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort®. These products and services ensure that businesses everywhere can substantially mitigate counterparty credit risk in both listed and over-the-counter derivatives markets.
The Globe logo, CME, Chicago Mercantile Exchange, CME Group, Globex, E-mini and CME ClearPort are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX and New York Mercantile Exchange are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. All other trademarks are the property of their respective owners. Further information about CME Group (NASDAQ: CME) and its products can be found at www.cmegroup.com.
Fastest Growing Interest Rate Product Ever Launched
CHICAGO, Jan. 11, 2011 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, today marked the one-year anniversary of the Ultra Treasury Bond contract. The contract, which is listed with and subject to CBOT rules, is the fastest growing interest rate product ever launched by the CME Group exchanges.
Robin Ross, Managing Director of Interest Rate Products, and Jonathan Kronstein, Associate Director of Interest Rate Products, discuss the one-year anniversary of the Ultra Bond contract here.
The Ultra Bond was launched on January 11, 2010, in response to strong customer demand for a contract that mimics the duration of a 30-year Treasury bond. Milestones include:
Nearly 4,500 contracts changed hands on its first day of trading;
First quarter average daily volume surpassed 14,000 contracts;
Fourth quarter average daily volume exceeded 52,000 contracts;
On November 24, the Ultra experienced record volume of 349,000 contracts traded, and record open interest of 380,000;
As of December 31, open interest was more than 307,000.
For more information about the Ultra Bond, please visit www.cmegroup.com/ultra.
As the world's leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) is where the world comes to manage risk. CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate. CME Group brings buyers and sellers together through its CME Globex® electronic trading platform and its trading facilities in New York and Chicago. CME Group also operates CME Clearing, one of the largest central counterparty clearing services in the world, which provides clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort®. These products and services ensure that businesses everywhere can substantially mitigate counterparty credit risk in both listed and over-the-counter derivatives markets.
The Globe logo, CME, Chicago Mercantile Exchange, CME Group, Globex, E-mini and CME ClearPort are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX and New York Mercantile Exchange are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. All other trademarks are the property of their respective owners. Further information about CME Group (NASDAQ: CME) and its products can be found at www.cmegroup.com.
Senin, 20 Desember 2010
James P. Marzano Goes From Bonds To System Development
James P. Marzano has been around the interest rate product scene for awhile. By Marzano's account, he made the first bond futures trade on the Chicago Board of Trade bond floor on Aug. 15, 1977. Now he's trying to get a new product for his trading application company - Applied 360 - off the ground.
This month, Marzano is launching Metrixx360, a product which Marzano describes as a real-time trading decision and support application that provides professional traders, hedge fund managers and portfolio risk managers with the calculation tools and market analysis necessary to support trading strategies and complex algorithmic trading applications. Metrixx360 is being launched this month to a select group of large traders that will act as beta test users. The full release of the product is slated for January of 2011.
"Our team has been putting the finishing touches on Metrixx360 as we roll it out with CQG, and in early next year with Trading Technologies," Marzano said during a recent interview with MarketsWiki senior editor/producer Christine Nielsen.
According to Marzano, Metrixx360 calculates all the critical relationships in the derivative markets which are usually rooted in the cash - futures basis in the spreads and intermarket spreads. The philosophy is that a trader needs to understand the impact of interest rates in any market that he or she trades.
"The people who seem to live the longest in the derivatives markets are the spreaders." To be able to do that, you need to understand the cost of money, Marzano says.
Marzano spent over 24 years as a member of the Chicago Board of Trade and the Chicago Mercantile Exchange. Along the way, he was chair of the municipal futures contract, financial instruments executive committee and business conduct committee.
He founded First LaSalle Services, Inc., a clearing member firm of the Chicago Board of Trade and the Chicago Mercantile Exchange. In the mid 1980s Marzano got more involved in system development. He was responsible for the founding and development of the Applied Municipal Network, an early contributor of data and synthetic price algorithms to Bloomberg; the Allport Portfolio System, which was in operation at CNA Insurance for over 20 years; and the development of Insignis, an investment management service in production for over a decade at large institutional investors including the General Motors Investment Management Company, the California Public Employees' Retirement System (CalPERS), JPMorgan Chase, and Indosuez Carr (which is now Newedge).
Marzano calls Metrixx360 a "culmination of what I've done in clearing, financing, arbitrage" of the experiences in these markets. Metrixx360 is available to subscribers of CQG and is expected to be available through other trading service providers in the future. Further, the company's "endgame is to use this technology to price OTC swaps," Marzano says.
This month, Marzano is launching Metrixx360, a product which Marzano describes as a real-time trading decision and support application that provides professional traders, hedge fund managers and portfolio risk managers with the calculation tools and market analysis necessary to support trading strategies and complex algorithmic trading applications. Metrixx360 is being launched this month to a select group of large traders that will act as beta test users. The full release of the product is slated for January of 2011.
"Our team has been putting the finishing touches on Metrixx360 as we roll it out with CQG, and in early next year with Trading Technologies," Marzano said during a recent interview with MarketsWiki senior editor/producer Christine Nielsen.
According to Marzano, Metrixx360 calculates all the critical relationships in the derivative markets which are usually rooted in the cash - futures basis in the spreads and intermarket spreads. The philosophy is that a trader needs to understand the impact of interest rates in any market that he or she trades.
"The people who seem to live the longest in the derivatives markets are the spreaders." To be able to do that, you need to understand the cost of money, Marzano says.
Marzano spent over 24 years as a member of the Chicago Board of Trade and the Chicago Mercantile Exchange. Along the way, he was chair of the municipal futures contract, financial instruments executive committee and business conduct committee.
He founded First LaSalle Services, Inc., a clearing member firm of the Chicago Board of Trade and the Chicago Mercantile Exchange. In the mid 1980s Marzano got more involved in system development. He was responsible for the founding and development of the Applied Municipal Network, an early contributor of data and synthetic price algorithms to Bloomberg; the Allport Portfolio System, which was in operation at CNA Insurance for over 20 years; and the development of Insignis, an investment management service in production for over a decade at large institutional investors including the General Motors Investment Management Company, the California Public Employees' Retirement System (CalPERS), JPMorgan Chase, and Indosuez Carr (which is now Newedge).
Marzano calls Metrixx360 a "culmination of what I've done in clearing, financing, arbitrage" of the experiences in these markets. Metrixx360 is available to subscribers of CQG and is expected to be available through other trading service providers in the future. Further, the company's "endgame is to use this technology to price OTC swaps," Marzano says.
Senin, 04 Oktober 2010
ELX's Response Regarding EFF Issues
ELX's response to the letter from CBOT dated
September 10, 2010 regarding the EFF transaction and related Core
Principle 18 issues.
(Letter Obtained From ELX)
October 4, 2010
Richard A. Shilts, Acting Director, Division of Market Oversight Commodity Futures Trading Commission Three Lafayette Center 1155 21st, N.W. Washington, D.C. 20581 Re: ELX Futures, L.P./Exchange of Futures for Futures Rule Dear Mr. Shilts: ELX Futures, L.P. (“ELX”), submits this response to the letter from Kathleen Cronin of the CME Group, Inc. (“CME”) on behalf of CME’s subsidiary Chicago Board of Trade (“CBOT”) to you, dated September 13, 2010 (the “CBOT Letter”), regarding ELX Rule IV-15 (the “EFF Rule”), which has been approved by the Commission and which authorizes the execution of Exchanges of Futures for Futures (“EFFs”) on ELX. ELX and the CBOT have previously submitted various letters to the Commission regarding this matter; the CBOT Letter was filed in response to questions and requests for information made by the Commission and the Division of Market Oversight (“DMO”) to the CBOT, dated August 13, 2010. Despite the fact that the CBOT Letter covers some 29 single-spaced pages, plus an extensive appendix, it adds no new information or arguments to the debate. To the contrary, the CBOT Letter simply restates and elaborates on the same misleading assertions and distortions included in the CBOT’s prior letters with respect to the EFF Rule. The Commission should reject the CBOT’s latest submission and should take prompt action to require the CBOT to permit the execution of EFFs by market participants.
Because the CBOT Letter adds nothing new to the Commission’s consideration of the issues related to the EFF Rule, we do not believe it is necessary to respond to each point raised in that Letter. Instead, we will focus only on the most significant misstatements made by the CBOT about the EFF transaction. First, the CBOT argues, as it has in the past, that EFFs should be prohibited because they constitute “wash
Wolkoff Letter for ELX Futures, L.P.
Page 2 of 5
October 4, 2010
trades” that “negate market risk.” This is simply not true, as the CBOT well knows and understands. A wash trade, as reflected in the precedents cited in the CBOT Letter, is one in which a party appears to take a bona fide market position, and expose itself to market risk, while in fact creating only the appearance of trading and offsetting the original trade in a way that avoids taking any market risk. One of the principal decisions cited by the CBOT, therefore, states that “[t]he central characteristic of a wash sale is the intent to avoid making a bona fide transaction or taking a bona fide market position.” CBOT Letter, p. 9, citing In re Citadel Trading Co. of Chicago, Ltd. (CFTC, May 12, 1986). That is not the case with EFFs. An EFF involves a transaction in which a party establishes a bona fide position in a futures contract for the purpose of obtaining, not avoiding, the market exposure incurred by virtue of that position. The fact that the EFF involves a transfer of that position to another exchange in no way affects the status of the position as one that creates, not negates, bona fide market risk. For this reason, among others, the Commission – the federal agency with the authority and the responsibility to interpret and apply the CEA – has determined that EFFs are not wash trades. The CBOT cannot then usurp the Commission’s authority by determining not to allow EFFs because it believes – contrary to the express views of its regulator – that they are wash trades. Of course, as evidenced by practices on its affiliated exchanges, the CBOT and its parent company do not actually believe that EFFs are illegal wash trades, but are simply using this argument as a convenient smokescreen for their anti-competitive conduct. Second, the CBOT argues that EFFs are “non-competitive trades,” and are prohibited on this basis as well. Again, the CBOT well knows that there are a variety of non-competitive trades that are permissible, and completely legal, on every exchange, including the CBOT and its affiliated exchanges. These include exchanges of futures for physicals, exchanges of futures for swaps, exchanges for risk, block trades and others. By characterizing EFFs as non-competitive trades, CBOT is attempting to conflate the term “wash trades” with the term “non-competitive trades” and bootstrap its contention that EFFs are “non-competitive” into an argument that they are wash trades. This distortion should not be countenanced. A wash trade might be non-competitive, but not all non-competitive trades are necessarily wash trades. More to the point, a non-competitive trade is not necessarily illegal and the Commission, as well as the CBOT’s own affiliates, have found that EFFs are permissible under the CEA. CBOT’s contention that the Dodd-Frank Bill has changed the statutory landscape is also misleading. The section of the Dodd-Frank amendment cited by the CBOT to support this argument has been in the Act under standards for contract market designation for many years, 7 USC §7 (b)(3). Moving the provision from one section governing contract markets to another is not a substantive amendment.
Third, CBOT fails to respond to the Commission’s request that CBOT provide a detailed explanation for the assertion that “permitting EFFs would enable ELX to free ride on CBOT’s investments in exchange facilities” or “clearing facilities.” This is not surprising, because permitting EFFs would not involve ELX’s use of any CBOT
Wolkoff Letter for ELX Futures, L.P.
Page 3 of 5
October 4, 2010
facilities. To the extent that CBOT customers would use their facilities to either enter or exit positions on ELX, they would do so in the context of their relationships with CBOT, having nothing to do with ELX, and CBOT would be compensated as part of such transactions. CBOT’s argument that compulsory EFFs would allow rivals to free ride on CBOT’s efforts to develop new contracts might make sense if the creation of such contracts generated protectable intellectual property or otherwise amounted to significant product innovation. But they do not, and CBOT acknowledges as much in its submission. (CBOT Letter, p. 17.) CBOT’s position amounts to an unjustifiable request that the Commission excuse its anti-competitive rule because it provides a shield from competition that intellectual property law fails to provide. CBOT primarily argues that EFFs will allow ELX to free ride on CBOT’s “pool of liquidity” and “open interest.” But permitting EFFs that will allow market participants to move more efficiently between products offered by ELX and CBOT and the competing platforms offered by the competing markets does not raise any free rider issue at all. To the extent that CBOT provides a better trading platform, better execution, and better services to its customers, those customers will not be lured away by competition from ELX – regardless of whether EFFs are available. But if ELX offers a more attractive and competitive market that results in customers moving between the markets, lowering barriers to permit such movements will enhance not harm competition. Moreover, such customer movement does not involve free riding at all -- ELX has listed its own contracts and has developed the terms and trading conditions for those contracts. The EFF Rule does nothing more than permit market participants trading those contracts, if they wish to do so, to transfer their open positions to another exchange that lists similar or identical contracts. Indeed, it is the customers that own the open interest in any event, not the exchanges, and the EFF Rule merely permits the owners of the open interest to hold it in the venue of their choosing. The positions then become open positions on that other exchange and cannot be characterized as ELX improperly taking the other exchange’s liquidity. Accordingly, the EFF Rule will operate only to enhance overall market liquidity, to the benefit of all market participants, and will encourage and promote competition among competing markets.
Fourth, while the CBOT Letter contends that EFFs executed pursuant to the ELX Rule are illegal wash trades it fails to consider that substantially similar trades are executed on its affiliated exchange, the New York Mercantile Exchange (“NYMEX”) and are permissible. NYMEX has a long history of using EFFs, and transactions called by other names, but having substantially the same purpose. While the CBOT Letter discusses the earliest such use involving the International Petroleum Exchange (“IPE”) and NYMEX Brent contracts, subsequent examples have included the e-mini natural gas and crude oil contract EFF Rules allowing them to be converted to the larger physically delivered contracts, and a history of allowing brokered transitory EFP and EFS
Wolkoff Letter for ELX Futures, L.P.
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October 4, 2010
transactions to facilitate position transfers between the Intercontinental Exchange and NYMEX. While there may be limited distinctions between the original NYMEX EFF Rule and the ELX EFF rule, none of these distinctions are relevant to the CBOT’s wash trade analysis. In addition to the other CME transactions which mirror the purpose of the EFF, other CME markets allow transitory EFRP transactions to establish or offset positions in foreign exchange futures, agriculture futures, precious metals futures, and hundreds of untraded, cleared only energy “futures” processed through the Clearport service. Ms. Cronin’s statement to Chairman Gensler that “all matched, prearranged transactions designed to negate market risk are prohibited by the CEA” ignores all these other examples under the CME roof that similarly meet her description of unlawful transactions. Her assertion is simply untrue and was already correctly found to be without merit by two CFTC Division heads and the full Commission. Therefore, the CBOT cannot claim that EFFs executed on ELX are illegal without reaching the same conclusion with respect to the NYMEX transactions, and the many others it countenances. Of course, CBOT does not reach that conclusion simply because it knows that the ELX EFFs are not illegal; its actual, and completely transparent, goal is to stifle competition by claiming that EFFs are illegal when it is convenient for it to make that claim. The arbitrary contrast between the CBOT’s views on the EFF Rule and its views on the NYMEX EFF rules and transitory EFRPs in other markets ultimately reveal its true anticompetitive intent and objectives.
The CBOT Letter fails to address, as the Commission and DMO requested, why its reasons for opposing the EFF transaction do not violate Core Principle 18. Indeed, the CBOT Letter makes clear that its reasons are driven by an anti-competitive motivation. CME’s views on wash trades, which appear to apply exclusively to ELX’s trades, but not CME’s, have been discredited by the Commission. Proffering a legal argument that our regulator has already twice dismissed in connection with this very issue, illuminates the anti-competitive motivation which is at the heart of CME’s anti-EFF posture. CME’s untrue claims of free-riding articulate how the EFF could harm the CME, but CME makes no real effort to address how the EFF does anything but benefit customers and the marketplace. Again and again the CBOT Letter reflects a concern for the CME’s own business issues. However, by arguing to protect its revenue base, rather than acting for the best interests of the market, the CBOT Letter fully supports a finding of anti-competitive intent, especially for an exchange with a market share above 90%.
Wolkoff Letter for ELX Futures, L.P.
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October 4, 2010
We would of course be pleased to discuss these issues further with the Commission or its staff. We very much appreciate your consideration of and attention to this important matter. Sincerely, cc: Mr. David Stawick (Secretary) Mr. Gary Gensler (Chairman) Mr. Michael Dunn (Commissioner) Mr. Bart Chilton (Commissioner) Ms. Jill Sommers (Commissioner) Mr. Scott O’Malia (Commissioner) Mr. Dan Berkovitz (General Counsel)
September 10, 2010 regarding the EFF transaction and related Core
Principle 18 issues.
(Letter Obtained From ELX)
October 4, 2010
Richard A. Shilts, Acting Director, Division of Market Oversight Commodity Futures Trading Commission Three Lafayette Center 1155 21st, N.W. Washington, D.C. 20581 Re: ELX Futures, L.P./Exchange of Futures for Futures Rule Dear Mr. Shilts: ELX Futures, L.P. (“ELX”), submits this response to the letter from Kathleen Cronin of the CME Group, Inc. (“CME”) on behalf of CME’s subsidiary Chicago Board of Trade (“CBOT”) to you, dated September 13, 2010 (the “CBOT Letter”), regarding ELX Rule IV-15 (the “EFF Rule”), which has been approved by the Commission and which authorizes the execution of Exchanges of Futures for Futures (“EFFs”) on ELX. ELX and the CBOT have previously submitted various letters to the Commission regarding this matter; the CBOT Letter was filed in response to questions and requests for information made by the Commission and the Division of Market Oversight (“DMO”) to the CBOT, dated August 13, 2010. Despite the fact that the CBOT Letter covers some 29 single-spaced pages, plus an extensive appendix, it adds no new information or arguments to the debate. To the contrary, the CBOT Letter simply restates and elaborates on the same misleading assertions and distortions included in the CBOT’s prior letters with respect to the EFF Rule. The Commission should reject the CBOT’s latest submission and should take prompt action to require the CBOT to permit the execution of EFFs by market participants.
Because the CBOT Letter adds nothing new to the Commission’s consideration of the issues related to the EFF Rule, we do not believe it is necessary to respond to each point raised in that Letter. Instead, we will focus only on the most significant misstatements made by the CBOT about the EFF transaction. First, the CBOT argues, as it has in the past, that EFFs should be prohibited because they constitute “wash
Wolkoff Letter for ELX Futures, L.P.
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October 4, 2010
trades” that “negate market risk.” This is simply not true, as the CBOT well knows and understands. A wash trade, as reflected in the precedents cited in the CBOT Letter, is one in which a party appears to take a bona fide market position, and expose itself to market risk, while in fact creating only the appearance of trading and offsetting the original trade in a way that avoids taking any market risk. One of the principal decisions cited by the CBOT, therefore, states that “[t]he central characteristic of a wash sale is the intent to avoid making a bona fide transaction or taking a bona fide market position.” CBOT Letter, p. 9, citing In re Citadel Trading Co. of Chicago, Ltd. (CFTC, May 12, 1986). That is not the case with EFFs. An EFF involves a transaction in which a party establishes a bona fide position in a futures contract for the purpose of obtaining, not avoiding, the market exposure incurred by virtue of that position. The fact that the EFF involves a transfer of that position to another exchange in no way affects the status of the position as one that creates, not negates, bona fide market risk. For this reason, among others, the Commission – the federal agency with the authority and the responsibility to interpret and apply the CEA – has determined that EFFs are not wash trades. The CBOT cannot then usurp the Commission’s authority by determining not to allow EFFs because it believes – contrary to the express views of its regulator – that they are wash trades. Of course, as evidenced by practices on its affiliated exchanges, the CBOT and its parent company do not actually believe that EFFs are illegal wash trades, but are simply using this argument as a convenient smokescreen for their anti-competitive conduct. Second, the CBOT argues that EFFs are “non-competitive trades,” and are prohibited on this basis as well. Again, the CBOT well knows that there are a variety of non-competitive trades that are permissible, and completely legal, on every exchange, including the CBOT and its affiliated exchanges. These include exchanges of futures for physicals, exchanges of futures for swaps, exchanges for risk, block trades and others. By characterizing EFFs as non-competitive trades, CBOT is attempting to conflate the term “wash trades” with the term “non-competitive trades” and bootstrap its contention that EFFs are “non-competitive” into an argument that they are wash trades. This distortion should not be countenanced. A wash trade might be non-competitive, but not all non-competitive trades are necessarily wash trades. More to the point, a non-competitive trade is not necessarily illegal and the Commission, as well as the CBOT’s own affiliates, have found that EFFs are permissible under the CEA. CBOT’s contention that the Dodd-Frank Bill has changed the statutory landscape is also misleading. The section of the Dodd-Frank amendment cited by the CBOT to support this argument has been in the Act under standards for contract market designation for many years, 7 USC §7 (b)(3). Moving the provision from one section governing contract markets to another is not a substantive amendment.
Third, CBOT fails to respond to the Commission’s request that CBOT provide a detailed explanation for the assertion that “permitting EFFs would enable ELX to free ride on CBOT’s investments in exchange facilities” or “clearing facilities.” This is not surprising, because permitting EFFs would not involve ELX’s use of any CBOT
Wolkoff Letter for ELX Futures, L.P.
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October 4, 2010
facilities. To the extent that CBOT customers would use their facilities to either enter or exit positions on ELX, they would do so in the context of their relationships with CBOT, having nothing to do with ELX, and CBOT would be compensated as part of such transactions. CBOT’s argument that compulsory EFFs would allow rivals to free ride on CBOT’s efforts to develop new contracts might make sense if the creation of such contracts generated protectable intellectual property or otherwise amounted to significant product innovation. But they do not, and CBOT acknowledges as much in its submission. (CBOT Letter, p. 17.) CBOT’s position amounts to an unjustifiable request that the Commission excuse its anti-competitive rule because it provides a shield from competition that intellectual property law fails to provide. CBOT primarily argues that EFFs will allow ELX to free ride on CBOT’s “pool of liquidity” and “open interest.” But permitting EFFs that will allow market participants to move more efficiently between products offered by ELX and CBOT and the competing platforms offered by the competing markets does not raise any free rider issue at all. To the extent that CBOT provides a better trading platform, better execution, and better services to its customers, those customers will not be lured away by competition from ELX – regardless of whether EFFs are available. But if ELX offers a more attractive and competitive market that results in customers moving between the markets, lowering barriers to permit such movements will enhance not harm competition. Moreover, such customer movement does not involve free riding at all -- ELX has listed its own contracts and has developed the terms and trading conditions for those contracts. The EFF Rule does nothing more than permit market participants trading those contracts, if they wish to do so, to transfer their open positions to another exchange that lists similar or identical contracts. Indeed, it is the customers that own the open interest in any event, not the exchanges, and the EFF Rule merely permits the owners of the open interest to hold it in the venue of their choosing. The positions then become open positions on that other exchange and cannot be characterized as ELX improperly taking the other exchange’s liquidity. Accordingly, the EFF Rule will operate only to enhance overall market liquidity, to the benefit of all market participants, and will encourage and promote competition among competing markets.
Fourth, while the CBOT Letter contends that EFFs executed pursuant to the ELX Rule are illegal wash trades it fails to consider that substantially similar trades are executed on its affiliated exchange, the New York Mercantile Exchange (“NYMEX”) and are permissible. NYMEX has a long history of using EFFs, and transactions called by other names, but having substantially the same purpose. While the CBOT Letter discusses the earliest such use involving the International Petroleum Exchange (“IPE”) and NYMEX Brent contracts, subsequent examples have included the e-mini natural gas and crude oil contract EFF Rules allowing them to be converted to the larger physically delivered contracts, and a history of allowing brokered transitory EFP and EFS
Wolkoff Letter for ELX Futures, L.P.
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October 4, 2010
transactions to facilitate position transfers between the Intercontinental Exchange and NYMEX. While there may be limited distinctions between the original NYMEX EFF Rule and the ELX EFF rule, none of these distinctions are relevant to the CBOT’s wash trade analysis. In addition to the other CME transactions which mirror the purpose of the EFF, other CME markets allow transitory EFRP transactions to establish or offset positions in foreign exchange futures, agriculture futures, precious metals futures, and hundreds of untraded, cleared only energy “futures” processed through the Clearport service. Ms. Cronin’s statement to Chairman Gensler that “all matched, prearranged transactions designed to negate market risk are prohibited by the CEA” ignores all these other examples under the CME roof that similarly meet her description of unlawful transactions. Her assertion is simply untrue and was already correctly found to be without merit by two CFTC Division heads and the full Commission. Therefore, the CBOT cannot claim that EFFs executed on ELX are illegal without reaching the same conclusion with respect to the NYMEX transactions, and the many others it countenances. Of course, CBOT does not reach that conclusion simply because it knows that the ELX EFFs are not illegal; its actual, and completely transparent, goal is to stifle competition by claiming that EFFs are illegal when it is convenient for it to make that claim. The arbitrary contrast between the CBOT’s views on the EFF Rule and its views on the NYMEX EFF rules and transitory EFRPs in other markets ultimately reveal its true anticompetitive intent and objectives.
The CBOT Letter fails to address, as the Commission and DMO requested, why its reasons for opposing the EFF transaction do not violate Core Principle 18. Indeed, the CBOT Letter makes clear that its reasons are driven by an anti-competitive motivation. CME’s views on wash trades, which appear to apply exclusively to ELX’s trades, but not CME’s, have been discredited by the Commission. Proffering a legal argument that our regulator has already twice dismissed in connection with this very issue, illuminates the anti-competitive motivation which is at the heart of CME’s anti-EFF posture. CME’s untrue claims of free-riding articulate how the EFF could harm the CME, but CME makes no real effort to address how the EFF does anything but benefit customers and the marketplace. Again and again the CBOT Letter reflects a concern for the CME’s own business issues. However, by arguing to protect its revenue base, rather than acting for the best interests of the market, the CBOT Letter fully supports a finding of anti-competitive intent, especially for an exchange with a market share above 90%.
Wolkoff Letter for ELX Futures, L.P.
Page 5 of 5
October 4, 2010
We would of course be pleased to discuss these issues further with the Commission or its staff. We very much appreciate your consideration of and attention to this important matter. Sincerely, cc: Mr. David Stawick (Secretary) Mr. Gary Gensler (Chairman) Mr. Michael Dunn (Commissioner) Mr. Bart Chilton (Commissioner) Ms. Jill Sommers (Commissioner) Mr. Scott O’Malia (Commissioner) Mr. Dan Berkovitz (General Counsel)
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