CBOT, CME and NYMEX Petition for Regulatory Exemption

The three largest U.S. futures exchanges have petitioned the Commodity Futures Trading Commission (CFTC) for regulatory relief in response to the CFTC's plan to process no-action requests from foreign boards of trade seeking to place trading terminals in the United States. "The exchanges need the regulatory relief requested in this petition in order to compete on equal terms with the foreign boards of trade who will be able to offer competing products via direct electronic access to persons in the U.S.," the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT) and New York Mercantile Exchange (NYMEX) said in a joint letter to acting CFTC Chairman David Spears. The U.S. exchanges' petition seeks exemptive relief to list new contracts for trading without pre-approval by the CFTC, to adopt new rules or rule changes upon 10 days notice to the CFTC, and to implement trading rules and procedures comparable to those of a competing foreign exchange. The foreign exchanges' no-action petitions, if approved, will allow them to mount a "devastating, unfair challenge" to U.S.-based exchanges, the CBOT, CME and NYMEX said in the petition. The foreign exchanges have not sought designation to operate as contract markets and will not have to comply with the Commodity Exchange Act (CEA) governing U.S. futures markets. In contrast, "U.S. exchanges will be required to compete in the U.S. under the burden of a heavy regulatory handicap that does not apply to foreign exchanges offering U.S. customers clone contracts on identical trading facilities." U.S. exchanges must comply with the CEA and obtain prior CFTC approval for all new rules or rule changes and for all new contracts they wish to trade. Such approval may take weeks or months, giving competitors an advantage in bringing critical products to market. "Foreign exchanges will be able to pay for order flow, permit pre-arranged trades, facilitate block trades with delayed price reporting, dispense with strict audit trail rules, and allow large traders to escape reporting requirements," the U.S. exchanges said in their petition. To level the regulatory playing field, the U.S. exchanges' petition seeks the right to obtain the same flexibility as their foreign counterparts. The CFTC's decision to begin processing no-action requests from foreign boards of trade came in the form of a Commission Order dated June 2. The CFTC has power under the CEA to grant such exemptions from provisions of the Act. In granting exemptive authority to the CFTC, Congress explicitly stated: "The Conferees intend that the Commission, in considering fair competition, will implement this provision in a fair and even-handed manner to products and systems sponsored by exchanges and non-exchanges alike."