DoJ calls for split of futures exchanges and clearing houses

DoJ calls for split of futures exchanges and clearing houses

The US Department of Justice (DoJ) is calling for the separation of clearing and settlement services from futures exchanges after finding the current structure - where market operators such as CME Group own and control their own clearing operations - inhibits competition.

The call comes in a submission to a Treasury Department review of the policies governing the regulatory structure of the financial markets.

The DoJ says the control exercised by futures exchanges over clearing services "has made it difficult for exchanges to enter and compete in the trading of financial futures contracts".

"Current rules and policies related to clearing futures contracts may be unnecessarily inhibiting competition among futures exchanges in the development and trading of financial futures contracts, to the detriment of the economy and consumers," says the document.

In contrast to futures exchanges, equity and options exchanges do not control "open interest, fungibility, or margin offsets in the clearing process", says the DoJ, and this "appears to have facilitated head-to-head competition between exchanges for equities and options, resulting in low execution fees, narrow spreads, and high trading volume".

The Justice Department cites failed attempts by Euronext.liffe and Eurex to move into the US futures markets as evidence that the current market structure has impeded competition.

However the DoJ's call appears to mark a turnaround by the department from its position last year when it approved, without any conditions, the merger between CME and Cbot.

In a statement released on 11 June 2007, the authority said there was "no evidence" that the CME's control of clearing services following the merger would reduce competition substantially. But there is speculation that the latest calls could have an impact on CME Group's proposed acquisition of New York Mercantile Exchange (Nymex), which would likely result in further consolidation of clearing and settlement services.

However the Futures Industry Association (FIA) has come out in support of the Justice Department's recommendation.

"We agree with the Justice Department's recommendation that the Treasury Department review whether exchange-controlled clearing of financial futures best serves market participants and the overall competitiveness of our financial markets," says FIA president John Damgard. "The FIA would welcome a study of these important issues by the Treasury Department or the Commodity Futures Trading Commission."

The release of the DoJ's letter comes as the merged CME Group reports a near doubling of fourth quarter profit of $201 million, from $103 million a year earlier. Fourth quarter group revenue increased 88% to $530.0 million.

CME Group says total volume exceeded 676 million contracts in the fourth quarter of which a record 81% were traded electronically.

"This strong volume drove $439 million in clearing and transaction fee revenue, an increase of 24% from $354 million on a pro forma basis in fourth-quarter 2006, assuming CME and Cbot were combined during that time," says the group in a statement.

Read the DoJ's statement here:

Download the document now 992.4 kb (PDF File)

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