House Ag Committee Hears Objections to Eurex U.S.

WASHINGTON (HedgeWorld.com)–The Agriculture Committee of the House of Representatives held its long-awaited hearing on the Eurex U.S. application for designated market status.

The chairmen of each of the Chicago futures exchanges testified on Nov. 6 to set out their common objections to the granting of this designation, at least on the basis of the existing application.

Charles P. Casey, chairman of the Chicago Board of Trade, charged that Eurex is not the “fully electronic” marketplace it presents itself to be. Eurex in Europe relies (and the U.S. version presumably will also rely in some part) upon a call-around telephone dealer market, one that he said “allows dealers to quote opaque prices to customers and to internalize order flow.”

Terrence A. Duffy, chairman of Chicago Mercantile Exchange Inc., said that the established exchanges are concerned that Eurex U.S., more formally the U.S. Futures Exchange LLC, plans to pay for order flow in what he called a “survival of the fittest” game to reward fiduciaries who direct their customers’ orders to the Eurex platform.

Although the Securities and Exchange Commission has long been critical of payment for order flow, the Commodity Futures Trading Commission, which must act on the Eurex U.S. application, has not previously considered the issue.

Mr. Duffy also referred to public reports that there have been several squeezes involving German debt at Eurex. Also, an international link that will allow the trading of the same contract in two jurisdictions with different regulatory requirements raises concerns that practices allowed in Germany but disallowed in the United States will directly affect the U.S. market. Such arrangements “present significant cross-border bankruptcy and other legal risks” Mr. Duffy said.

As to the application itself, Mr. Duffy called it an “empty shell,” omitting crucial facts concerning its regulatory, clearing, settlement and financial responsibilities.

CFTC Chairman James E. Newsome spoke to many of these points in his testimony. As to the linkage with Europe, he also is aware of public statements by Eurex US that it intends to offer a link with Eurex Clearing at some future time, but that isn’t in the pending application, and neither the underlying statute nor the CFTC’s regulations require that “an application for designation as a contract market include all future clearing plans that may be contemplated, or future plans in general.”

Any proposal that would permit a cross-border clearing link, Mr. Newsome said, would require additional CFTC action and additional opportunities for public comment.

On the subject of incentives for volume, Mr. Newsome said that certain forms of incentive, such as fee holidays for new products or reduced fees for market makers, have long been deemed acceptable within the established exchanges. He assured the committee that the CFTC would not allow Eurex U.S. to offer any incentive program that the established exchanges also are not allowed to offer.