UPDATE: CME Won't Permit Traders To Move Positions To ELX

CME Group Inc. (CME) officials said Wednesday that it didn't have to accept Treasury futures trades that could see positions shifted to a rival's clearinghouse.

The assertion follows U.S. regulators' approval of a rule submitted by start-up exchange ELX Futures LP, aimed at allowing investors to move Treasury derivatives positions between CME's clearinghouse and the Options Clearing Corp., which handles ELX trades.

ELX sought the rule as it tries to wrest Treasury futures business from incumbent CME, so far having taken about 2.5% of the market since its July launch.

However, CME's legal experts argue the Chicago-based exchange operator is not required by regulators to accept trades made for the purpose of moving Treasury futures positions to another clearinghouse.

U.S. futures regulation allows exchanges to clear their own products in-house, requiring traders to buy and sell contracts at the same venue. 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.

Improved fungibility in futures has been a goal of ELX as it challenges CME, and the Commodity Futures Trading Commission's approval of the ELX rule was seen by the exchange as a slight step forward.

The so-called Exchange of Futures for Futures rule, or EFF, could let investors offset positions held at the two markets, according to ELX, while helping traders avoid margin calls where there is no market risk.

Market participants looking to do an Exchange of Futures for Futures transaction would privately negotiate to buy and sell contracts on two exchanges - for example, one trader might buy 100 December-dated futures contracts on the 30-year Treasury bond from a second trader at ELX.

At the same time, the second trader would buy 100 December 30-year bond futures from the first trader at CME. The traders' clearing firms would then report the transaction to CME's clearinghouse and the Options Clearing Corp., which clears trades for ELX.

But CME spokesman Allan Schoenberg said that CME, as a designated contract market, has had a "long-standing policy" prohibiting "contingent, transitory trades" such as those described by the ELX rule.

Neal Wolkoff, chief executive of ELX, countered that there is "no regulatory basis" to prohibit such transactions.

"The CFTC has found the rule complies with the law," he said. "Use of rule enforcement powers to deny market participants use of an approved rule would be solely based on anti-competitive purposes."

ELX, backed by a group of banks, trading firms and technology companies, is seeking competitive edges as it goes up against Chicago-based CME and faces another rival in NYSE Euronext (NYX), which is developing U.S. interest rate derivatives as part of an alliance with the Depository Trust and Clearing Corp.

ELX offers markets in two-, five-, ten- and 30-year Treasury futures, mirroring core markets of CME.

-By Jacob Bunge, Dow Jones Newswires; [phone]; [e-mail]