August 16, 2010 / 3:59 PM / 9 years ago

CME defiant on ELX trade rule as probe launched

NEW YORK (Reuters) - CME Group Inc said it would continue to prevent investors from easily moving contract positions between it and smaller rival ELX Futures LP, despite a letter from a regulator saying that the practice was sound and that it had opened an antitrust probe.

The exchange operator said the letter from the Commodity Futures Trading Commission did not change the rules of its Chicago Board of Trade unit, which prohibits so-called exchange of futures for futures (EFF) in U.S. Treasury futures.

The spat over EFFs erupted in the last year as ELX sought a way to win market share from CME, which has a near monopoly. In a flurry of letters, Wall Street-backed ELX said CME is misleading regulators, while CME said EFF violated its rules.

On Friday, the CFTC sent CME a letter stating that ELX’s EFF transactions are consistent with precedent, are not prohibited nor mandated by the Commodity Exchange Act and other regulations, and are not “wash sales” — the simultaneous and offsetting purchase and sale of a contract.

The regulator added in the letter that it launched an antitrust investigation into an October CBOT notice in which the exchange said its rules do not permit EFF transactions.

The CFTC said it has made no decision yet on the antitrust issue, but asked that CME Group answer a dozen questions justifying its ban on EFFs — including a request for all documents outlining “potential customer demand for EFFs” and a step-by-step plan for permitting the trades.

Chicago-based CME, which in the past suggested EFFs could be wash trades, effectively said on Monday that it was not budging. “CBOT will continue to prohibit EFFs, which would reduce transparency and price discovery in CBOT Treasury futures markets,” it said.

ELX, which is owned by Goldman Sachs Group Inc and JPMorgan Chase & Co and others, said Monday the CFTC has once again taken its side.

“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 Neal Wolkoff said, adding it will “vigorously pursue full acceptance” of the trades.

Shares of CME were up 1.3 percent at $247.99 on the Nasdaq.

Reporting by Jonathan Spicer, editing by Gerald E. McCormick, Lisa Von Ahn and Robert MacMillan

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