Neal L Wolkoff 

Chief Executive Officer 

ELX Futures L.P. 

January 27, 2009 

T. 212 294 8056 

F. 212 294 8058 

Via eRulemaking Portal 

Mr. David Stawick 

Secretary to the Commission 

COMMENT 

ELX 

II 0 East 59th Street 

New York, NY 10022 

nwolkoff@elxfutures.com 

Commodity Futures Trading Commission 

Three Lafayette Center 

1155 21st Street, N.W. 

Washington, D.C. 20581 

Bectrank 

Liquilily 

Exchange 

. 'I 

Re: Supplemental Statement Regarding Comments Posted by the CME on Proposed 

Rules on Block Trading and EFP and EFS Transactions, 73 Fed.Reg. 54097, September 

18,2008 

Dear Mr. Stawick, 

This is in response to a recommendation contained in the comment letter filed by the 

Chicago Mercantile Exchange ("CME") in connection with Federal Register Release 73 

Fed.Reg. 54097 concerning, among other things, guidance on block trading standards. 

ELX Futures, L.P. ("ELX" or "Electronic Liquidity Exchange") filed its own comment 

letter on January 5, 2009. The CME's comment at issue has significant anticompetitive 

implications for ELX inasmuch as ELX has an application pending with the CFTC for 

approval as a Designated Contract Market ("DCM") to trade products that compete 

directly with futures contracts that are mainstays of the CME since its acquisition of the 

Chicago Board of Trade, specifically United States Treasury Futures Contracts. 

Presently, only the CME offers exchange based trading in U.S. Treasury Futures. 

ELX fmds unacceptable the recommendation made by the CME that, as the DCM at 

which the liquid U.S. Treasury Futures Contracts are traded, the CME should be granted 

the authority to determine the appropriate minimum block trading size for ELX and any 

other fledgling competitor. The CME writes: 

Vl 

'i 

C.J 
"in order to receive safe harbor treatment, any DCM listing a 

particular contract should be required to set its block trade 

threshold size at the level which would constitute an appropriate 

minimum size for block trades in the most liquid substantially 

identical contract on any DCM, to the extent that it is able to 

determine such appropriate minimum size." (See Page 4 of 

CME Comment Letter) (The entire section under discussion can 

be found at the end of this letter) 

Delegating rule-making authority to the CME to set block trading requirements for 

competing markets is nowhere supported or proffered in the CFTC's proposal. Indeed, 

on its face the CME's recommendation is anticompetitive and flies against the CFTC's 

statutory mandate contained in Section 15(b) of the Commodity Exchange Act to regulate 

in a manner that follows the least anticompetitive path possible in maintaining the 

public's interest in the protections of the antitrust laws. Contrary to the CFTC's mandate, 

the CME's proposal would have the CFTC implement a regulation that protects 

established exchanges from competitors which might be aided by employing more 

aggressive practices than an established market may choose within appropriate bounds of 

market integrity. The CME would have the CFTC hand over the regulatory authority to 

the CME to set the block trading standards based on its own competitive wishes. 

Competition can be based not on just on price, but on quality or other attributes - here 

including block trading size. 

The crux of CME' s argument is that a new market with a "copycat" contract can do great 

harm to an established, liquid market by enticing some of its liquidity away through 

liberal block trading rules. However, the issue cited by the CME as a problem inherent 

with allowing a competitor exchange from setting a lower block trading threshold than an 

established market uses - namely the potential harm to liquidity in the established market 

by encouraging competition in established products - is not a rational concern because 

products traded at the CME and elsewhere are not fungible. 

While contracts at different exchanges may have similar, or the same, terms and 

conditions, and may thus be termed "competitive contracts," in the sense that they may 

fulfill the same or similar demands and thus demand may be elastic, they are not fungible 

contracts inasmuch as they clear at different clearinghouses and cannot be offset against 

each other. The data is clear that similar, non-fungible contracts are complementary and 

supportive of each other, and are in no way destructive of each other, as is shown later, 

below. 

ELX strongly maintains that the issue at hand has nothing to do with the CME' s 

expressed concern about market integrity, but everything to do with the impact that 

implementing its suggestion would have in creating a barrier to competition. If we 

accepted, as CME contends, that competition from block trading standards can hurt 

established markets, and implicitly the public interest, the logical inference from this 

argument is that any competition against established markets such as CME's is highly 

suspect and should be frustrated or stopped. ELX argues against accepting as policy a 

2 
recommendation that would produce the anticompetitive effect of protecting a monopolist 

instead of enlarging the market 

At ELX, we believe that competition needs to be encouraged, not further thwarted. I 

For an upstart exchange like ELX, so many barriers to competition already exist in the 

futures exchange arena that adding barriers should be avoided at all costs2

. 

But an additional problem with the proffered argument - that competition from nonfungible similar or competitive contracts can harm the established, liquid contract - is that 

it is unambiguously rebutted by the data. 

As shown below using relevant examples of comparable non-fungible contracts involving 

different futures exchanges, and also the OTC market and a futures exchange, the CME's 

purported concern for the market's welfare has no basis in fact. 

On February 3, 2006, the Intercontinental Exchange ("ICE") offered for electronic 

trading futures contracts in crude oil that mirrored the terms and conditions of the wellestablished crude oil futures contracts offered for floor trading on the NYMEX. The ICE 

contracts, in facts, used the NYMEX final settlement price as its own fmal cash 

settlement, and so could not have been more alike to the established contract. For the 

year 2005, the year before ICE introduced non-fungible copies of the NYMEX futures 

I In a Department of Justice comment letter dated January 31, 2008 addressed to the 

Department of the Treasury (TREAS-D0-2007 0018) DOJ commented on the very issue 

of the benefits that users of futures markets could gain from added competition, as 

follows: 

In contrast to futures exchanges, equity and options exchanges do not control 

open interest, fungibility, or margin offsets in the clearing process. This lack of 

control appears to have facilitated head-to-head competition between exchanges 

for equities and options, resulting in low execution fees, narrow spreads, and high 

trading volume. Equities and options execution systems are also very 

sophisticated and feature-rich, more so than futures contract execution systems. 

Although characteristics of the equities and options markets differ from those of 

financial futures markets, the clearing processes and related regulatory framework 

in equities and options markets appear to provide useful lessons in the futures 

arena. In light of the potential competitive benefits that could flow from 

regulatory changes that would facilitate competition in fmancial futures exchange 

markets, the Department recommends that Treasury propose a thorough review of 

futures clearing and its alternatives. 

http://www .usdoj .gov/atr/public/comments/22991l.htm 

2 ELX is the fourth exchange over a ten year period trying to compete with the CME and 

its predecessor, the CBOT, in offering trading in U.S. Treasury Futures Contracts. The 

other three efforts failed. 

3 
contract, NYMEX traded 59.6 million crude oil futures contracts (source:NYMEX.com). 

In 2007, the year after ICE launched its copy-cat contracts, ICE traded 51.4 million crude 

oil futures contracts, and NYMEX traded 121.5 million crude oil futures contracts, more 

than doubling NYMEX' s volume from just one year before ICE started to compete. If 

we add ICE's volume with NYMEX's volume in 2007, total crude oil futures volume 

tripled from the year before to the year after the start of competition from a non-fungible 

copycat contract. 

(Source:http://files.shareholder.com/downloads/ICE/Ox0x154677/65066e8a-6a78-4ac3-

aad4-c96bfb05aece/284485 .pdf) 

The comparison of OTC and futures markets in domestic interest rate contracts provides 

another relevant comparison of the effect of non-fungible comparable products on each 

other's liquidity. Over the course of several years we have seen the positive influence on 

futures volume from OTC interest rate contracts that mirror or closely resemble the terms 

and conditions of regulated interest rate futures contracts. The OTC contracts are not 

fungible with the futures contracts, and yet have not decreased volume in the regulated 

markets. To the contrary, it is widely accepted that the OTC markets have added 

significant volume to the interest rate futures markets through arbitrage, added price 

discovery, and increased need for hedging risk from OTC exposure. 

As early as November 1999, The Report of the President's Working Group on Financial 

Markets ("Over-the-Counter-Derivatives Markets and the Commodity Exchange Act," 

http://treas.gov/press/releases/docs/otcact.pdf) noted the growing convergence between 

the terms and conditions of interest rate OTC contracts and interest rate futures contracts: 

As OTC markets develop, however, the extent to which market 

participants engage in large numbers of transactions with 

similar terms increases, because certain instruments serve the 

risk-management needs of a large number of market 

participants. Thus, the opportunity to negotiate the terms and 

conditions of an instrument may exist, but in practice this 

opportunity may not be used to a great extent for certain types 

of instruments, such as certain "plain vanilla" interest rate 

swaps. Moreover, although the widespread use of innovations 

such as electronic trading and clearing have the potential to 

increase efficiency and reduce systemic risk, they could also 

blur some of the distinctions between exchange-traded and OTC 

instruments. 

According to a study presented by the Bank for International Settlements (BIS) in Paris in 

· December 1-2, 2008, ("On-exchanges and OTC derivatives statistics The BIS statistical 

Framework," http://www.world-exchanges.org/files), as OTC interest rate contract 

volume expanded from 2005-2008, there was a similarly significant increase in volume in 

non-fungible exchange traded interest rate futures contracts. As stated by the President's 

Working Group, the OTC contracts are mostly "plain vanilla" copies of the exchange 

traded futures, and thus the parallel increase in volume across markets is a fair 

4 
relationship rather than two individual and unrelated events. (BIS reports a 50% volume 

increase in interest rate futures occurred from the first half of 2005 to the second half of 

2008 and an 87.5% increase occurred in OTC interest rate contracts during the same time 

period; See Accompanying BIS Chart on page 7). 

The CME does not allow open access for other exchanges to use its clearinghouse. Even 

if the CME's argument had merit- and we dispute it and have disproven that a nonfungible competing contract could harm a liquid contract - the CME controls the remedy 

to its asserted problem. By opening up its clearinghouse the CME can allow for 

fungibility between products and eliminate any liquidity or market integrity concern 

whatsoever, although its exchange business might suffer. By locking out competitive 

exchanges from using its clearinghouse, the CME has guaranteed that competitive 

contracts could not clear there and thus would not be fungible with the CME products. 

As the leading domestic exchange offering fmancial futures contracts- and the only 

domestic exchange currently offering U.S. Interest Rate Futures Contracts- this 

represents a monopolist position by the CME vis a vis most fmancial futures, including 

U.S. Treasury Futures Contracts. 

If competitive contracts at different exchanges were allowed to compete on price, quality 

of technology, service, and innovation, but were otherwise fungible, liquidity would shift 

from the exchange offering lesser services at higher prices to the other exchange. Users 

of the contract would enjoy a single unified pool of liquidity, but no single corporation 

could control fees and other terms of service. Without fungible clearing, another 

exchange seeking to shift liquidity away from the CME with a product sharing identical 

terms and conditions, but without fungibility, would fmd it a difficult job to shift liquidity 

using the normal tools available to a typical competitor because of the ownership and 

control the CME has over the clearinghouse that clears futures in the existing liquid 

market. 

Although it may seem obvious, the context in which the generic language of the CME's 

proposal is stated nonetheless should be highlighted. Although the CME looks to apply 

its proffered standard - which we contend is impermissibly anticompetitive - on "any 

DCM," thus appearing to capture a wide net of affected exchanges, the reality is that the 

CME executes and clears more than 95% of U.S. regulated futures volume. The CME, 

thus, is virtually the sole beneficiary of its "generic" standard. The CME is asking the 

CFTC in essence to delegate to it, a private company, and a monopoly, the power to set 

standards that affect competitive conduct among its peers and would-be peers. ELX, of 

course, is a pending competitor, and strongly objects to any delegation of power by the 

CFTC to the CME, a private company, to establish block trading thresholds or any other 

standard that might affect ELX as a competitor, or that might further deter, inhibit or 

prohibit market competition. 

5 
CONCLUSION 

In conclusion, the notion that a non-fungible contract with identical terms and conditions 

to an established product steals liquidity from the mature market is certainly disproven 

from the available data, and is a protectionist argument that cannot withstand scrutiny 

beneath face value. Given the CME's monopoly position in the liquid market it should 

not be dictating the standards of competition- whether block size or any other market 

attribute. 

Thank you for your consideration, and please include this comment in the public 

comment file. 

Very truly yours 

6 
0 BANI FOR INTERNATIONAL SETTLEMENTS 

Global derivatives market 

By market risk category1 

OTCmarke~ 

D Foreign exchange 

Ellnlereslrate 

l!il!l Equity 

•Other 

0rgMized exchanges 

El Foreign exchange 

•lnlerestrale 

•Equitytindex 

2005 2006 2007 2008 

1 Notional amounts outstanding in trillions of US dollars. 

Sources: FOW TRAOEdata; Futures Industry Association; BIS 

7 

Restricted 
Text ofCME's Section on Setting Block Size 

(c) Any DCM listing a particular contract should set/Is block trade threshold size at the level 

which would constitute an appropriate minimum size for block trades on the most liquid DCM 

which lists a substantially identical contract. 

The Commission has stated in a footnote in the notice of rulemaldng that the proposed guidance 

regarding threshold size for block trades "could result In different DCMs arriving at different minimum size 

requirements for the same or similar futures contracts, if the liquidity and volume on each DCM is 

different." 73 FR 54100, fn. 14. We believe that, where the Commission's suggested formulation is 

being relied upon by a DCM for purposes of falling within the acceptable practices safe harbor, a DCM 

should be required to set its minimum block trade size at a level that would be appropriate for the most 

liquid substantially Identical contract that is trading on any centralized DCM market. Indeed, It appears 

that, in its July 1, 2004 NPRM, the Commission may have adopted the view that trading In all markets 

offering similar contracts should be considered, by defining the 'relevant marker as 'the subject futures 

or options market. any related derivatives market, and/or the underlying cash market, as appropriate." 

(Emphasis added). 69 FR 39885. 

In addition, as noted above, the currenUy proposed guidance states that a DCM could estimate an 

appropriate minimum block trade size for new contracts based on market data relating to the same 

contract traded on another exchange. If a DCM were permitted to set a minimum size for block trades in 

a contract that it is newly listing, without considering available Information about trading actiVity In a 

substantially Identical liquid market on another DCM, it could Impair the usefulness of the price discovery 

information being provided by the previously listing DCM by setting its own threshold too low. It should 

be noted that we are not suggesting that If a DCM sets a higher block trade size than what the guidance 

defines as an appropriate minimum, any DCM that subsequenUy lists a substantially identical contract 

must adopt that higher threshold. Rather, in order to receive safe harbor treatment, any DCM lis6ng a 

particular contract should be required to set its block trade threshold size at the level which would 

constitute an appropriate minimum size for block trades in the most liquid substantially identical contract 

on any DCM, to the extent that it is able to determine such appropriate minimum size.2 

8