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CFTC Approves Eurex US as Designated Contract Market

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WASHINGTON ( – After an open meeting in which Michael Gorham, director of the division of market oversight, laid out his staff’s views, the Commodity Futures Trading Commission unanimously approved designation of the U.S. Futures Exchange LLC as a designated contract market.

Wednesday’s meeting of the CFTC attracted a lot of attention. Chairman James E. Newsome joked, “I’ve never seen so many ties on our staff as this morning … you guys are looking great.” He soon introduced Dr. Gorham, who presented the case for approval, subject to certain undertakings that the CFTC has negotiated with USFE, also known as Eurex US.

“There is nothing in the act or in the regulations that causes us, or even allows us, to discriminate between those [applicants] that are foreign owned and those that are not,” Dr. Gorham said.

In response to some of the specific issues raised in connection with this application, Eurex has undertaken not to use any clearing organization that is not approved by the CFTC; to provide to the CFTC, one month in advance of its proposed effective date, notice of any non-traditional fee or incentive program; and to refrain from operating the BrokerTec Futures Exchange in reliance upon the designation the BTEX previously received. Eurex purchased BrokerTec in mid-January Previous HedgeWorld Story.

That latter point set off some discussion between commissioners and staff over the transferability of designated contract market status in general.

Last year, there was a transfer of half of the ownership of NQLX, a single-stock futures exchange. Nasdaq transferred its half to its original partner in that venture, LIFFE, now Euronext.liffe. In that case, according to general counsel Patrick McCarty, the designated contract market status remained uninterrupted because the CFTC received proper notice of the change and the change in ownership did not result in any change in the operations of the exchange. Accordingly, change of ownership was not a means for evading the application process.

In the case of Eurex, the applicant represented that it had not purchased BrokerTec as part of any effort to end-run that process, and in order to assure the regulators of this it undertook not to rely on BrokerTec’s designation.

Just before the vote, Commissioner Walter L. Lukken said that he has “been disappointed to read stories in the media that suggest that the Commission has somehow been dragging its feet in this matter.” That is false, he said–any delay has resulted from the inherent complexity of the issues.

The designation documents specify that The Clearing Corporation need not seek CFTC approval to enter into a cross-margining arrangement for non-customer purposes, with respect to Eurex-listed and traded contracts, so long as the margin arrangements are made with a CFTC-approved derivatives clearing organization or a clearing agency registered with the Securities and Exchange Commission.

The Clearing Corporation, formerly Board of Trade Clearing Corporation, entered into an arrangement with Eurex in May 2003 Previous HedgeWorld Story.

In anticipation of CFTC approval for Eurex US and perhaps as a sign that competition will be fierce, Chicago Board of Trade had announced Tuesday that it is launching electronic trading of German debt futures contracts, known as Bund Bobl and Schatz futures. The bund is a 10-year security, the Bobl is five years, the schatz, two years. Eurex, Frankfurt, has long dominated the market in these products.

A spokesman for Eurex, Wednesday said that Eurex’ chief executive Rudolf Ferscha is delighted with the CFTC decision. Eurex is confident that its U.S. launch will proceed as planned this Feb. 8, 7 p.m. CST, with its initial products of futures and options on two-, five- and 10-year Treasury notes and on 30-year Treasury bonds.

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