Owned by several large banks, New York-based ELX is a start-up rival to CME, offering interest rate futures. Exchange of Futures for Futures (EFF) is a practice whereby a firm can open a trade at one exchange and close it at another.

This could enable ELX to attract more trading because market participants would know they could trade out at the reliably liquid CME if ELX’s market proved too shallow.

CME, which owns the Chicago Board of Trade, the dominant exchange for US Treasury futures, objects strongly to the idea, seeing it as a way for ELX to free-ride on its liquidity.

The CFTC has issued a series of decisions on this dispute, each time siding with ELX. Critically, however, it has still stopped short of insisting that CBOT accept trades from ELX.

The CFTC’s letter on August 13 was a response to a CBOT self-certified Market Regulation Advisory Notice issued on October 19, 2009.

In that notice, CBOT objected to the CFTC’s decision to authorise ELX participants to carry out EFFs. The Chicago exchange said its rules did not permit the execution of EFF transactions, that they were not supported by CFTC precedent and that they were prohibited under the Commodity Exchange Act and CFTC regulations.

The Commission said it had reviewed and rejected these arguments. It does not agree that EFF trades, when used to “solely liquidate and establish lookalike futures positions on different designated contract markets, are wash or fictitious trades”.

Wash trades are banned, as they can be used to manipulate prices.

The CFTC said that ELX’s EFFs were not prohibited by the CFTC’s Core Principle 9, which governs execution of transactions.

No budging

CME Group quickly insisted that the CFTC’s letter would not change its policy.

However, the CFTC has now begun to review whether CME’s behaviour is anti-competitive, under Core Principle 18. It gave the exchange 30 days to respond to 12 areas of concern.

Neal Wolkoff, chief executive of ELX Futures, responded vehemently: “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 intends to vigorously pursue full acceptance of the EFF and will assist the Commission and its staff in any way to complete its antitrust analysis of the rationale behind the treatment of EFFs.”

The CFTC’s ruling on the competition question may finally bring an end to this year-long dispute.

ELX Futures would be rash to assume the decision will go its way – not every judgement in derivatives markets has favoured the new entrant recently.

Although the issues were different and the case was decided by courts rather than the regulator, it was the Chicago Board Options Exchange that emerged triumphant in July from a four year battle with the International Securities Exchange, which wanted to be able to list options on the Dow Jones Industrial Average and S&P 500 Index. The court upheld CBOE’s contractual claim to exclusive rights to these indices.