The Wall Street Journal-20080206-Justice Department Pushes Futures-Exchange Change

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Justice Department Pushes Futures-Exchange Change

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The Justice Department called for a shake-up in financial-futures exchanges, saying regulatory policies may have inhibited competition.

The department called for an end to futures exchanges owning or controlling the business of "clearing," or the trade processing in which third parties help guarantee timely payments on investors' market wagers. The Justice Department said the structure for clearing has served as an impediment to new entrants to markets.

The call for reform marked an apparent turnaround from the Justice Department's position last year when it approved without any conditions a merger between the two large Chicago futures exchanges.

The recommendation, dated Jan. 31, but disclosed yesterday, could have implications for the potential merger of CME Group Inc., parent of the Chicago Mercantile Exchange, with New York Mercantile Exchange parent Nymex Holdings Inc., a transaction under discussion that likely would lead to further consolidation among clearing functions.

The Justice Department said its recommendations dealt with financial futures, not the energy futures that Nymex trades. But the department would need to review a Nymex deal, so its concerns aren't a positive sign for an easy passage.

The new letter was submitted to the Treasury Department as it reviews financial regulatory policies. The Justice Department wrote that rules for clearing futures may be inhibiting competition "to the detriment of the economy and consumers."

The Justice Department's approval of the Chicago Board of Trade-CME merger focused on whether that deal would lessen competition, while the new letter addresses whether regulation could be improved.

That likely would require input from Congress, the Treasury and the Commodity Futures Trading Commission.

A CME spokeswoman said the exchange's clearing "model is time-tested for 100 years, and it continues to prove itself as the standard in the industry."

The Justice Department report cites two unsuccessful efforts in recent years by European exchanges to take market share in Chicago's bond and interest-rate futures. The Justice Department's position was supported by the Futures Industry Association, a trade group for futures brokerage firms.