CME Group welcomes the opportunity to participate in industry discussions concerning market structure and the organization of clearing and settlement services.
CME Group believes that market driven solutions and a range of choice in execution and clearing services best serves the interests of market participants. In execution services, the global futures and options industry offers a wide range of choice, from open auctions, central limit order books and call markets on fully regulated exchanges, exempt platforms and other markets with varying levels of regulatory oversight, depending on the types of products, customers and trading interests involved.
Similarly, the global derivatives industry offers trading and clearing services through both exchange owned, vertically integrated and independently operated clearing organizations, as well as bilateral trading with no central counterparty clearing services, or central counterparty clearing services for OTC derivatives transactions that are unbundled from execution services.
CME Group believes that Congress, in enacting the Commodity Futures Modernization Act of 2000, appreciated the merits of a free market solution to the organization and ownership of clearing houses. It rejected suggestions that clearing houses be taken from exchanges and converted into user owned utilities. Congress adopted an extremely flexible approach to regulation that promoted innovation and competition by avoiding a one-size-fits-all model. More importantly, CME Group believes that the Commodity Futures Trading Commission, the House and Senate Agriculture Committees and Congress itself, understands the following critical distinctions between securities and options markets versus derivatives and futures markets:
- Vertical Clearing is the Industry Standard. Unlike domestic stock and options exchanges, domestic futures exchanges compete directly with non-U.S. futures exchanges, where 70% of all futures and options contracts traded globally are cleared on or through exchange owned or controlled clearing facilities. Any failure to recognize that fact would create an un-level playing field for U.S. futures exchanges at a time when U.S. futures exchanges are the strongest example of how to maintain our overall competitiveness in global financial markets -- a key area of concern in recent times.
- Horizontal Clearing Providers do not Permit Fungibility. Even independent clearing providers have commercial agreements with their exchange and platform customers that do not permit fungibility across competing contracts without the consent of the exchange/platform customer. The absence of cross-exchange fungibility has not impaired innovation or competition in the derivative industry. New product and system innovation is unparalleled and customer fees and costs are close to insignificant in relation to the value of the services performed.
- Current Market Trends Favor Increased Vertical Clearing. The current trend in the marketplace is toward integration of clearing facilities into futures and options markets (e.g., ICE's acquisition of NYBOT, NYCC Clearing and its announced separation from LCH.Clearnet and the creation of ICE Clear in Europe). This trend is not an accident. Markets operate more efficiently when they control their own clearing operations.
- Derivatives and Futures Products are Inherently Different than Securities and Equities Options Products. Unlike securities and equity options instruments, futures products are not identical. Unlike equity exchanges that simply trade an instrument issued by a corporation, futures exchanges invest considerable time and capital in creating new products and designing trading methods and specifications that appeal to customers.
- Government Does Not Control Privately Owned Clearing Facilities. Vertically-owned clearing houses already exist and cannot simply be "taken" by government action. The futures industry has long permitted the development and growth of exchange owned clearing houses. Any decision that would result in the taking of that property would require extensive legislative review and discussion to ascertain the impact such a decision would have on the ultimate users of futures products.
- Publicly Owned Clearing Houses Better Serve the Public Interest. There is no public purpose served by attempting to transfer ownership of exchange-owned clearing facilities to intermediaries who will simply operate such facilities for their own benefit and not the benefit of market users.
- Exchange Owned Clearing Houses Enhance Transparency and Reduce Systemic Credit Risk. Intermediaries may limit central counterparty clearing services to selected products and markets, limiting greater transparency and exacerbating credit risks in swap and credit markets in order to maintain proprietary trading profits or prime brokerage revenue streams at the expense of market integrity and the safety and soundness of our financial markets.
- Futures Exchanges Generally Offer Lower Total Transaction Costs than Securities and Equity Options Markets in Comparable Products. Claims that independent clearing arrangements in futures markets will increase market efficiency are false. Evidence amply demonstrates that total liquidity costs in futures and options markets are considerably lower than in securities and equity options markets. Moreover, decreased spreads in equity options markets following multiple listing initiatives reflect the increased competition associated with breaking down designated primary market maker or specialist order allocations or trading preferences that increased transaction costs for customers in those markets. Unlike securities and equity options markets, futures exchanges do not employ such systems.
In a separate statement, The New York Mercantile Exchange, Inc., a subsidiary of NYMEX Holdings, Inc. (NYSE: NMX), believes that a market-driven regulatory structure can most efficiently and safely meet the needs of a broad array of derivatives market users, particularly during dynamic periods of growth and volatility. The vertically integrated clearing model has stood the test of time for more than a century, including more than 80 years of federal regulation and Congressional oversight.
In passing into law the landmark Commodity Futures Modernization Act of 2000, Congress once again rejected an approach under which market structure would be dictated by government fiat. By avoiding a "one-size-fits-all" model, Congress has instead provided for substantial flexibility in how companies may organize their businesses and still comply with regulatory requirements. We continue to believe that Congress made the appropriate choice by focusing upon a free market solution that also involves both self-regulation as well as direct oversight by the Commodity Futures Trading Commission.
Our experienced staff has ensured that NYMEX continued to serve its market users without incident through periods of major market volatility. Any mandate or fiat that clearing of a given product must occur on numerous clearing organizations would actually increase systemic risk and default risk and also would seriously undermine the ability of a pro-active clearing organization such as NYMEX to manage market risk.