CME: SEC-CFTC Report Lifts 'Cloud' Around Futures Fungibility

A top executive for CME Group Inc. (CME) said Friday that a joint report from U.S. market regulators swept away concerns that Washington might fundamentally shake up the way U.S. futures exchanges do business.

The report, focused on bridging gaps between the Securities and Exchange Commission and the Commodity Futures Trading Commission, acknowledged fundamental differences between stock and derivatives market structure and opted to allow U.S. futures bourses to continue clearing their own products.

"That lifted a big regulatory cloud from our world," said CME Executive Chairman Terry Duffy, in an interview Friday.

Shares of derivatives exchange operators CME and IntercontinentalExchange Inc. (ICE) rose on the news, bucking a broad market downturn.

CME shares recently were up 2.7% at $317.34, with ICE up 6.3% at $104.40.

Friday's report followed a series of September hearings examining a host of regulatory topics applying to both securities and futures markets, including the issue of fungibility of futures contracts.

In securities and options markets, investors can put on a position at one exchange and take it off at another, a practice known as fungibility.

However, U.S. law lets futures exchanges operate their own clearinghouses, requiring traders to buy and sell futures contracts on the same exchange, which makes trading and clearing more profitable for exchanges like CME and ICE.

The futures industry has argued that the current framework is necessary to compete against foreign rivals that also clear their own products.

But critics at the September hearings said that this approach impedes competition among exchanges in the U.S. market and translates to higher prices for investors.

The joint SEC-CFTC report Friday made no recommendation as to futures exchanges' vertical integration of clearing, though regulators again expressed support for fungibility of over-the-counter derivatives across multiple clearinghouses.

Regulators on both sides of the Atlantic have previously weighed the competitive impact of vertical integration in the derivatives sector.

CME's share price fell heavily in January 2008 after a Justice Department memo suggested that the issue be re-examined, while Germany's Deutsche Boerse AG (DBOEF, DB1.XE) has also argued against concerns raised by the European Commission about combining clearing and trading.

Executives for CME have stressed that developing proprietary futures contracts takes significant research and investment, as opposed to vanilla cash equities and options contracts.

Another concern is that systemic risk could rise if Washington forces the market to reconcile credit profile differences across multiple futures clearinghouses.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; [e-mail]