Reactions to CBOT/CME Common Clearing

The CFTC received other comments, two of them from the Board of Trade Clearing Corp., Chicago. The BOTCC itself filed a brief reaction, and its outside counsel filed a more detailed argument. That longer comment was prepared by Kenneth M. Rosenzweig, a partner with Mayer, Brown, Rowe & Maw LLP, and it too focuses on 701.01. Mr. Rosenzweig contends that this provision, which he calls the follow-the-shepherd rule, is inconsistent with the CFTC’s statutory mandate to avoid adopting any rules or taking any actions that result in any unreasonable restraints of trade.

For 78 years, the BOTCC had cleared trades for the CBOT Previous HedgeWorld Story. This spring, that long relationship broke asunder. The CBOT sought to acquire the BOTCC, but the terms it offered proved unacceptable and the two firms have gone their separate ways–CBOT into its link with CME and BOTCC toward a relationship with Eurex, which will likely open a U.S. operation early next year.

Under those circumstances, Mr. Rosenzweig’s concerns were somewhat different from those of the FIA–less prospect, more retrospect.

“The CBOT’s designation of the CME as its new clearinghouse on a going-forward basis is not the subject of this letter. In other words, we express no view as to whether the CBOT should instruct its members that trades made on or after a given date must be submitted to the CME. Rather, we wish to focus the Commission’s attention on whether an exchange may require its members … to terminate their existing clearinghouse contracts, against their will and without the permission or consent of that clearinghouse.”

Mr. Rosenzweig is a former chairman of the futures and derivatives law committee of the Chicago Bar Association. His comment, like the FIA’s, lamented the quickness of the comment deadline. He said that the BOTCC would have been likely to comment on “the other rules that have been submitted by the CBOT and CME” beyond 701.01, had it not been for the “limited opportunity that has been provided for public comment.”

The CFTC replied to concerns about timing that it struck the best balance it could. “Given the fact that the commission is not obligated to post this rule for comment, our goal was to balance the opportunity for public comment with the timeline in the [two exchanges'] agreement.”

When it announced its approval of the rules late Tuesday afternoon, the CFTC also hinted that it is open to modification of 701.01. “The Commission is aware of public and industry interest in related policy issues regarding market structure and competition, and looks forward to hearing more on these issues,” the statement said. “The Commission believes, however, that this broader dialogue should not impede the planning necessary to move forward to implement the link in an orderly manner. The Commission believes that it is of paramount importance to enhance legal certainty concerning the procedures to implement the link so that all affected parties may make plans as necessary for a smooth and orderly transition beginning in November.”

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