CME Lashes Out at CFTC

Terry Flanagan

In blistering attack, futures exchange says agency has failed to abide by principles laid down by White House.

The Commodity Futures Trading Commission is being roundly criticized by industry participants for taking an overly prescriptive approach with regard to rulemaking under the Dodd-Frank Act.

CME Group has taken a shot at the agency, saying that it’s failed to abide by the executive order issued in January by President Obama, which requires agencies “to propose or adapt a regulation only upon a reasoned determination that its benefits justify its costs” and to “tailor its regulations to impose the least burden on society consistent with obtaining regulatory objectives.”

In a letter sent Monday, CME chief Craig Donohue said that the CFTC has failed to abide by the principles of the executive order. In its revision of regulations pursuant to Dodd-Frank, the CFTC has not relied on guiding principles rather than prescriptive ones, he said.

Particularly rankling, from CME’s standpoint, is a proposed rule from the CFTC that would require that a minimum of 85 percent of trading in any contract listed on a designated contract market (DCM) must occur on the centralized market. If a contract fails to meet this test, the DCM is required to delist the contract and transfer the open positions in the contract to a swap execution facility (SEF).

FinReg requires that CFTC’s Core Principle 9 be amended such that boards of trade must provide mechanisms for executing transactions in a way that protects the price discovery process of trading in the centralized market.

The CFTC asserted that the 85 percent threshold is necessary “to balance the goal of protecting the price discovery process of trading in the centralized market.”

The CFTC had proposed the rule last December with a comment deadline of Feb. 22, and then extended the deadline to April 18 to give interested parties the opportunity to comment on off-market volume data on which the CFTC relied upon for its rulemaking.

CME and other participants argue that the 85 percent threshold is arbitrary, and runs counter to the intended result of FinReg to promote transparency in markets.

“With regard specifically to the 85 percent requirement, there is no ability for new products to build a following, which typically happens in off-exchange transactions, which in turn essentially shuts down, or at least severely deters, any new products from entering the market,” Trish Rogers, co-chair of the financial institutions group at Moye White, told Markets Media.

The off-market volume data, which the CFTC has made public, lists hundreds of futures and options products, along with the percentages of each product that trade off-exchange. The data is apparently intended to bolster the CFTC’s view that a significant percentage of trading in products takes place away from the exchange on which they’re listed.

CME Group and ICE Futures contend that the off-market volume data does not provide a case for the reasoning contained in the CFTC’s rulemaking.

ICE Futures said that the data, which looks at three random months of trading volume (May 3, 2010 to July 30, 2010), is an insufficient reference period. At the very least, the CFTC should review data over a one-year period in order to have a valid basis on which to determine the appropriate minimum percentages, it said.

CME Group’s response was particularly blunt. “It appears as if the Commission plucked the 85 percent number out of thin air and then looked at the off-exchange trading percentages for a random number of contracts trading on some, but not all, DCMs,” it said. “A spreadsheet of numbers serving as a random sample of which contracts would fail the Commission’s arbitrary 85 percent test does not satisfy the Commission’s obligations.”


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