Futures-Exchange Collusion Suit Nears Trial -- WSJ

By Alexander Osipovich 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 16, 2018).

Exchange giant CME Group Inc. is facing scrutiny over its political clout and hardball tactics as a 14-year-old lawsuit nears trial.

The suit contends that two big Chicago futures exchanges -- now both part of CME Group -- illegally colluded to prevent a foreign rival, Eurex, from intruding on their home turf. Eurex's U.S. exchange filed the suit in October 2003 against the Chicago Board of Trade and the Chicago Mercantile Exchange. It later revised the suit to accuse CME and CBOT of manipulating regulators and politicians to sabotage Eurex's bid.

CME denies the allegations and is making a last-ditch effort to have the suit thrown out. It says Eurex's U.S. venture -- called U.S. Futures Exchange and now fully owned by Deutsche Boerse AG -- failed because of its own missteps.

"After more than a decade, this lawsuit is still no substitute for USFE's lack of a compelling business strategy," a CME spokeswoman said. "This case is simply USFE's and Eurex's attempt to shift blame for their own failure."

Rivals have grumbled for years that CME routinely uses its heft in the markets and influence in Washington to shield itself from competition. The Eurex case offers a rare glimpse into such behind-the-scenes maneuvering by the Chicago giant.

It could also reignite complaints that CME engages in anticompetitive behavior, which the company denies. CME handles the vast majority of trading in markets such as U.S. stock-index and interest-rate futures. That is largely because futures are a winner-take-all business: Once a market is established, it is hard for a rival to convince traders to switch exchanges.

The case is scheduled to go to trial before a jury in Chicago on June 4, following years of wrangling over the complex legal issues at stake.

A trial could result in top CME brass being called to testify, including Chairman and Chief Executive Terrence Duffy, the mastermind of a series of deals that turned CME into the world's largest exchange operator by market capitalization.

CME, which has a market cap of $56 billion, can weather the costs of the case. If it loses, it could be forced to pay up to $1.5 billion, based on estimates in court filings that Eurex suffered $512 million in damages and provisions of antitrust law that allow it to seek triple that sum.

A trial could dredge up embarrassing details about a long-ago chapter of CME's history.

Internal documents disclosed in court filings this month shed light on CME's response to the Eurex threat. In a 2003 memo titled "CME/CBOT Washington Strategy," two CME lobbyists detailed a plan to delay the approval of Eurex's U.S. exchange by the Commodity Futures Trading Commission.

Part of their proposal: enlisting then-House Speaker Dennis Hastert to add a provision to a spending bill that would have forced the CFTC to prolong the process.

"This strategy would need to be carried out in an extremely discrete manner and we believe the only person who can get this accomplished is Speaker Hastert," says the memo, sent to Mr. Duffy and other CME executives.

It is unclear whether CME approached Mr. Hastert, who declined to comment through his lawyer. In the 2002 election cycle, CME's political-action committee and people affiliated with the company donated more than $40,000 to Mr. Hastert, a Republican from Illinois, according to OpenSecrets.org. Mr. Hastert joined CME's board after leaving Congress and was a member from 2008 to 2015.

Delays in winning CFTC approval caused Eurex to miss a planned launch in February 2004 by a week. USFE's suit says uncertainties over the process scared off traders. CME says the delay was insignificant and that its lobbying activities were appropriate, focused on issues of market fairness and shouldn't be considered violations of antitrust law.

The all-electronic Eurex was the world's largest derivatives exchange by volume in 2003 when it took on Chicago, setting up its U.S. offices in the Sears Tower. Its plans to launch a suite of U.S. Treasury futures were a direct threat to CBOT, the dominant player in that market.

Eurex -- then a joint venture of Deutsche Börse and what is now called the SIX Swiss Exchange -- had grown rapidly by embracing technology. Meanwhile, CME and CBOT ran old-fashioned trading floors alongside computerized platforms and had been criticized for being slow to adapt to the rise of electronic trading.

But the Chicago exchanges reacted quickly to the threat. CBOT severed ties with its clearinghouse -- the entity that runs the financial plumbing for a futures exchange -- and agreed to use CME's clearinghouse. That undermined Eurex, which hoped to clear trades through the same clearinghouse as CBOT. Such an arrangement would have made it easier for traders at CBOT to jump ship for Eurex.

CBOT also slashed fees days before the Eurex launch. The upstart exchange floundered and eventually closed in 2008.

The suit also alleges that CME and CBOT intimidated traders seen as supportive of Eurex. In an April 6 filing, USFE said security at CBOT's building in Chicago harassed some visitors, telling them they couldn't enter because they were "working with the competition." The filing states that a baseball was thrown at Dennis Dutterer, then-head of CBOT's longtime clearinghouse, as he was walking in the building.

CME says there is no evidence to support such claims. Mr. Dutterer, reached for comment by telephone, said he couldn't recall the baseball incident.

Write to Alexander Osipovich at [e-mail]

(END) Dow Jones Newswires

April 16, 2018 02:47 ET (06:47 GMT)

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