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Department of Justice Says Regulations May Have Stymied Exchange Competition

The Department of Justice (DOJ) says existing regulatory policies may have prevented new futures exchanges from competing with the Chicago Mercantile Exchange (CME), suggests ending the practice of self-clearing.

Related feature: New Electronic Futures Exchange Could Take On Chicago Mercantile Exchange

The electronic futures exchange debate grew louder in early February when the Department of Justice (DOJ) issued a comment letter stating that existing regulatory policies may have stymied new entrants and competition in the space. This comes on the heels of ongoing chatter about a new consortium planning to launch an electronic futures exchange, dubbed Four Seasons, to compete with the Chicago Mercantile Exchange (CME).

"Based on its extensive experience investigating competitive conditions in various financial markets, including financial futures, options, and equities, the Department believes that certain regulatory policies governing financial futures may have inhibited competition among financial futures exchanges, potentially discouraging innovation and perpetuating high prices for exchange services," the DOJ commented in a submission to a Treasury Department review of the policies governing the regulatory structure of the financial markets.

The DOJ went so far as to suggest ending the practice of self-clearing by futures exchanges. In today's market structure, it is difficult for new financial futures products to provide "sustained head-to-head competition against existing products," the DOJ pointed out, adding that an independent clearing entity could ease these competitive difficulties.

"If greater head-to-head competition for the exchange of futures contracts could develop, we would expect it to result in greater innovation in exchange systems, lower trading fees, reduced tick size, and tighter spreads, leading to increased trading volume," the DOJ noted.

Kevin McPartland, a senior analyst at TABB Group, says this new information will most likely not have an effect on the Four Seasons initiative getting off the ground.

"Any changes like this would take years, and I don't think anyone is really worried about a looming change," he explains. "Obviously, people will be keeping an eye on it and listening. But I don't see any immediate changes, and I don't think it will have an impact."

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