CME Group Inc CEO Craig Donohue told employees he is pleased with many of the provisions in Washington's financial reform bill, but raised concerns about the leeway it gives regulators.
The U.S. exchange and clearinghouse operator strongly supported a late addition to the bill that prohibits mandated linkages for clearing houses, also known as interoperability, Donohue and government relations head Linda Rich said in an internal memo dated June 30 and obtained by Reuters.
Despite others' attempts to make this a competitive issue, we should remain focused on the amendment's positive impact on managing credit risks and reducing broader industry systemic risks, the executives said in the memo.
Senate Democrats appear to have enough votes to pass the bill. A final vote is expected by the end of the week that would bring big changes for derivatives markets, forcing many new products through exchanges and clearinghouses.
CME is the world's biggest operator of futures exchanges and runs one of its biggest clearinghouses. Maintaining walls between futures clearinghouses is key to CME's ability to turn a profit because it prevents new entrants from readily building off its established liquidity.
Donohue and Rich said they supported the bill's open access requirement under which traders may choose where to clear swaps.
Still, the letter warned that the bill gives more latitude than we feel may be appropriate to the Commodity Futures Trading Commission, which oversees the futures industry.
It suggested that under the bill, the CFTC could direct a clearinghouse to clear a swap that it preferred not to.
The bill would impose regulation for the first time on the $615-trillion over-the-counter derivatives market -- including credit default swaps like those that dragged down AIG -- in an effort to avoid a repeat of the 2007-2009 financial crisis.
The letter also repeated CME's position that exchanges, not regulators, should set limits on traders' holdings based on liquidity and the number of contracts in existence.
CFTC Chairman Gary Gensler has spearheaded a push to apply position limits on oil and natural gas futures markets to clamp down on speculators that some blame for driving oil prices to record highs in 2008.
The bill specifies that regulators must only set position limits as appropriate and sets out a list of factors that should be considered, the memo noted. Our concern is that certain elements of the CFTC have demonstrated that they are likely to ignore those constraints.
Another CME concern is how the CFTC will define a hedge. We are concerned that the CFTC will follow the suggestion of the legislation and limit 'hedges' to transactions that are pure substitutes for transactions in a physical marketing channel, the memo said.
A CME spokesman confirmed that the company's positions had not changed since the letter was sent.
CME and rival IntercontinentalExchange Inc may benefit from the bill. While ICE got the jump on clearing CDS last year, CME, which also clears CDS, plans to clear interest rate contracts this year.
(Reporting by Jonathan Spicer and Ann Saphir; editing by Gary Hill, Andre Grenon and Robert MacMillan)