CHICAGO (Reuters) - A proposed rule meant to protect investor access to fair prices on U.S. futures markets will instead drive business to less-regulated venues, boost costs, and stifle competition, the exchanges warned.
Eleven exchanges — including NYSE Euronext’s U.S. futures market, exchange giant CME Group Inc, energy markets operator IntercontinentalExchange Inc and Wall Street-backed ELX Futures LP — took aim at the rule in comment letters posted late Tuesday to the Commodity Futures Trading Commission’s web site, an unusual chorus of unity among fierce competitors. Fund manager Blackrock Inc also opposed the rule.
At issue is a CFTC proposed requirement that 85 percent of trading in any given contract take place on a futures exchange, rather than in so-called block trades conducted away from exchanges and later reported to them. The rule, largely overlooked in public commentary until now, is one of hundreds written since the passage of last summer’s Wall Street reform legislation.
When it proposed the 85-percent threshold back in October, the CFTC said it wanted to “protect the price discovery process” on futures markets.
But in comment letters late Tuesday, several exchanges argued that block trades do not impede price discovery and in fact reduce unnecessary market volatility.
Imposing an “arbitrary” minimum for on-exchange trading would in fact force the delisting of many popular futures contracts, including CME’s flagship Standard & Poor’s 500 Index futures and some agricultural contracts, they said.
“The minimum trading threshold set by the Commission would allow only the most liquid contracts to remain as futures,” warned IntercontinentalExchange.
The rest, ICE and others said, would either stop trading entirely or need to be converted to swaps so that they could be traded on so-called swap execution facilities, a new type of trading venue created by the Dodd-Frank Act.
Such a result is only one of several “perverse” effects of the rule, NYSE Euronext unit NYSE Liffe US said.
“We submit that the Commission’s overall objective to protect the public interest would be better served by constructing a regulatory regime that encourages trading activity to remain on more highly regulated (designated contract markets) rather than on less regulated platforms,” the exchange said.
Republican CFTC commissioners Jill Sommers and Scott O’Malia dissented on the proposal, but were overruled by CFTC Chairman Gary Gensler.
The rule would also deter exchanges, whether new entrants or established giants, from listing new contracts, and keep new exchange operators from starting up at all, several exchanges said. Most contracts take several years before the majority of trades are conducted on exchange, and exchanges would be unlikely to take the risk of facing delisting should their contracts not catch on fast enough, they said.
Several exchanges also said the rule would raise costs, with CME saying it would result in customers of its over-the-counter derivatives clearing service needing to post an additional $3.9 billion in margins.
Reporting by Ann Saphir, Editing by Chizu Nomiyama