NYX Nyse Euronext

U.S. lawmakers Wednesday floated an amendment to sweeping new financial regulations that would cement the near-monopoly held by futures exchanges over many product lines.

The amendment to commodities market law, offered by the House, would prevent any clearinghouse from having to take on the credit risk of another clearinghouse.

While the final language remains subject to change, its insertion would maintain the barrier to so-called "inter-operability" between clearinghouses set up to handle futures trades.

Futures markets are often viewed as natural monopolies because trading tends to flow to the largest pool of business because traders can secure the best price, even if trading costs on a rival platform are lower.

The inability to switch positions between clearinghouses has helped create a near-duopoly in futures trading by CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE), despite some overlap and the expansion plans of NYSE Euronext (NYX) and new entrants such as ELX Futures LP.

"This limit will tend to concentrate business at the biggest exchanges/clearing houses," said analysts at Concept Capital in Washington.

The amendment is backed by CME and ICE, and comes as lawmakers near completion in crafting broad new rules for U.S. financial markets, after the credit crunch of 2008 exposed numerous risks to the system.

Debate on the House offer is set to commence Thursday. Once the final changes have been made, it will be sent to the Senate, which must accept, reject or counter the offer.

Clearinghouses serve as central counterparties to trading activity, standing between transactions to reduce the risk to the market if a member of the clearinghouse defaults.

In U.S. securities and options markets, trades go through one clearinghouse set up for each asset class. But in futures markets, exchanges can own their own clearinghouses, which handle specific contracts traded on each market.

Under this structure, traders who want to trade on CME's interest-rate futures markets must clear their transactions at the exchange's own clearinghouse, whereas investors seeking to buy or sell shares in General Electric Co. (GE), for example, could trade the stock on any platform.

Competing futures exchanges have launched copycat versions of CME's products, but the critical mass of trading activity held by CME has made it tough for rivals to gain much traction.

Futures exchange operators such as CME and ICE have warned that tearing down the walls between their clearinghouses could increase systemic risk. They have cautioned that as more and more clearinghouses are set up to handle derivatives, standards governing risk and collateral could fall as the units compete for business.

Making one clearinghouse take on positions held at another venue could introduce risk that the first clearinghouse isn't comfortable holding.

"We support lawmakers' efforts to reduce systemic risk in the financial markets, and as markets become increasingly interconnected, central counterparties have to carefully manage risk and not be forced to assume counterparty credit risk of other clearinghouses," said a CME spokesman.

Neal Wolkoff, chief executive of upstart exchange operator ELX Futures LP, told lawmakers in a letter that the "vague" amendment would make it harder for other markets to compete against CME, which is "seeking to protect the status quo."

The proposal could prove problematic for ELX, which is locked in a dispute with CME over a rule that would let customers arrange to move futures positions between the two exchanges' clearinghouses. ELX is pushing for the rule, while CME has vowed to block such transactions. Regulators have yet to decide the matter.

In addition to the amendment on inter-operability, CME scored a separate victory in a proposal that would exclude futures from "open access," wherein traders of over-the-counter derivatives are allowed to decide where their transactions are cleared.

Commodity Futures Trading Commission Chairman Gary Gensler has supported open access for swap products as a way to promote competition among clearing venues. Separating out futures from the provision protects CME's home turf by ensuring that trades on CME's markets cannot be cleared elsewhere.

-By Jacob Bunge and Sarah N. Lynch, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

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