CME Opposition to Proposed Clearinghouse Regulation

Compass Lexecon experts Professor Robert Willig, Professor Dennis Carlton, and Dr. Hal Sider assisted CME Group in its successful opposition to a proposed regulation that would require the CME Clearinghouse to transfer open interest to a rival exchange’s clearinghouse. ELX, an electronic exchange that trades contracts that are “clones” of those traded at CME Group’s Chicago Board of Trade (CBOT), argued that competition was harmed by CBOT rules requiring market participant firms to close all positions through open market transactions. ELX advocated that the Commodities Future Trading Commission (CFTC) require CME Group to transfer open interest to rival clearinghouses. Professors Willig, Carlton and Dr. Sider showed that the proposed regulation (i) would enable ELX to free-ride on prior investments by CBOT thus harm incentives for exchanges to invest in creating contracts and improving trading services; and (ii) would harm competition by enabling traders to circumvent CBOT rules that promote market transparency, liquidity and integrity. After proceedings spanning nearly two years in which the CFTC staff initially endorsed the ELX position, the CFTC concluded that the CBOT’s rules did not harm competition and rejected the proposed regulation. CME Group’s effort was led by Ben Crisman and John Lyons at Skadden, Arps, Slate, Meagher & Flom LLP.