June 24, 2010 / 8:00 PM / 9 years ago

UPDATE 1-Derivatives amendment prompts outcry on competition

*Amendment is one of 110 items in House offer

*CME supports it; ELX, broker-dealer group oppose

*Unclear if amendment will remain in final bill (Recasts, adds comments from ELX CEO, CME)

By Karen Brettell and Ann Saphir

NEW YORK/CHICAGO, June 24 (Reuters) - A last-minute addition to U.S. legislation designed to reduce risks in the $450 trillion derivatives markets is prompting an outcry over its potential to limit competition.

The proposal, one of 110 put forward by the House of Representatives team negotiating derivatives reforms, would prevent clearinghouses from being forced to accept contracts from other clearinghouses. The proposal was offered “in order to minimize systemic risk...”

CME Group Inc, the futures giant that runs one of the world’s biggest clearinghouses, says the language keeps it from having to take on unwanted risk.

But allowing clearinghouses to reject contracts from rivals could crimp competition and make it harder for clients seeking the best prices when trading the contracts, argues the Swaps and Derivatives Market Association, which comprises more than 20 U.S.-based broker-dealers and futures commission merchants.

The amendment is also too vague, ELX Futures LP CEO Neal Wolkoff told Reuters in an interview on Thursday.

“Congress may be adopting ambiguous legislation that on its face has the tendency to support a noncompetitive status quo situation,” Wolkoff said. “It has the potential to be anti-competitive, to cause confusion in rule-making and contains no context of what specifically the issue is that it is looking to address.”

Lawmakers are aiming on Thursday to complete a historic overhaul of financial rules, with laws intended to regulate derivatives among the most contested aspects of the bill.

Key to the reforms are requirements that the majority of privately traded derivatives be routed through central counterparties, which stand between trading partners and guarantee the trades, in order to reduce systemic risks posed by a large counterparty collapse.

But the SDMA said Wednesday’s amendment may limit competition among firms seeking to clear contracts.

The provision “could be used by one clearing house, associated with one exchange or swap execution facility, to refuse acceptance of a trade initially executed on a competitor exchange or swap execution facility and cleared by a competitor clearing house,” the SDMA said.

“This would have the practical impact of restricting access to the best prices on identical derivatives contracts traded on different exchanges,” it added.

Jared Seiberg, analyst at investment firm Concept Capital, said on Wednesday that the provision would benefit the CME Group (CME.O), the world’s biggest operator of futures exchanges.

“This limit will tend to concentrate business at the biggest exchanges/clearing houses. That is why this is seen as a win for CME,” Seiberg said.

The CME and the IntercontinentalExchange Inc (ICE.N) are the only two exchanges to have begun clearing credit default swaps in the United States. Buyside participation has been limited by a small product choice as well as concerns about contract details and the protection of collateral backing the positions.

“CME Group supports lawmakers’ efforts to reduce systemic risk in financial markets,” a CME spokesman said on Thursday. “As markets become increasingly interconnected, CME Group believes that central counterparties must carefully manage and not be forced to assume the significant counterparty credit risks of other clearinghouses.”

It is unclear how many of the 110 House proposals will remain in the final bill, which Senate lawmakers must also agree to. Negotiators are aiming to complete the bill this week. (Additional reporting by Roberta Rampton and Charles Abbott in Washington; Editing by Diane Craft and Dan Grebler)

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