US Dept of Justice looks to the Futures [market]

Connected events or simply co-incidence? Following the public announcement of Project Rainbow, which is consortium effort to create a new competitor to the existing derivatives exchanges, the US Dept of Justice has expressed its concern about exchanges owning clearing infrastructure, with the resultant ability to block new entrants from accessing the latter.

Project Rainbow’s backers include Barclays, Deutsche Bank, Goldman Sachs, JPMorgan, MF Global, NewEdge and UBS and are proposing to trade popular contracts on their own exchange. However, a key barrier to the success of such a venture, as Eurex and Liffe both found in the US, is an inability to clear trades in the same clearing house as the incumbents.

Firms prefer to use a single clearer because positions and related collateral required to support "open interest" can be netted, thereby making trading more asset efficient. Where open interest is split across different clearer, margin has to be lodged in each location and no offset is possible.

Were Rainbow able to get access to the CME clearing house, it would dramatically increase the likelihood of them being able to shift liquidity from the incumbents because brokers will be able to open a contract on either exchange and close it on the other.

The DoJ has now asked the US Treasury to investigate the matter. The US regulator, CFTC, is supporting the status quo even though customers are demanding open access to the clearing infrastructure. This will be an interesting battle pitching domestic interest versus international players, with the added spice that the former head of Goldman Sachs, Hank Paulson, is the current US Treasury Secretary.

Disclosure - I was previously a board director at MF Global, one of the backers of Rainbow.

posted by John Wilson @ 9:20 AM Permanent Link newsvine reddit


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