"If exchanges did not control clearing, an appropriately regulated clearing house could treat contracts with identical terms from different exchanges as interchangeable, that is, fungible. The incentives of such a clearing house would be to maximise its own profits,” wrote the DOJ.
"In a world of fungible financial futures contracts, multiple exchanges could simultaneously attract liquidity in the same or similar futures contract, facilitating sustained head-to-head competition," it continued.
The regulator pointed to the equity exchanges where there is heated competition for liquidity. It attributed this characteristic to the fact that these exchanges do not control open interest, fungiblity, or margin offsets in the clearing process.
The DOJ also used the example of the 10-year Treasury note, of which it estimates the CME has “a market share of essentially 100%”. There are analogous contracts listed on the New York-based NYSE Euronext-owned London International Financial Futures Exchange (Liffe), Frankfurt-based Eurex, and New Jersey-based Icap-owned BrokerTec. However, the CME’s clearing house has higher margin requirements for these contracts.
Chairman emeritus of the CME Leo Melamed defended its pricing, arguing that it is not as much based on the product itself, but more on how much activity a customer does with the exchange, which provides insight and transparency into a customer’s offsetting positions.
"Our capital charge is based on a portfolio monitoring, so that we know what other positions this customer has that offset that. It’s a balanced approach to know how much capital a customer needs. It would ludicrous to say that we can’t do that, but you can’t have it both ways,” said Melamed.
"The [DOJ] comment was not on target with the discussions that were being held under the auspices of the Treasury, which had nothing to do with the structure of our markets. This was an unsolicited comment with unclear motivations,” he added.
The impetus might have come from the European Commission's Code of Conduct for Clearing and Settlement, which will lead to the opening of all vertical-integrated cross-border equity clearing houses to other electronic trading platforms, after pricing and technical capabilities systems are analysed. The equity clearing houses are expected to be opened by the end of 2008.
"Technically this should apply to futures, but it didn’t strike the European Commission as pressing because the Commission is focused on the individual investor and not institutional investors. Futures are mainly used by institutional investors in the EU,” said a Brussels-based source.