Chicago’s futures exchanges have overcome one of the key hurdles in their effort to combine trade-clearing systems, agreeing to a governance structure that splits control evenly between exchanges and trading firms, sources said Tuesday.
In a five-hour meeting Monday night, representatives from the exchanges and firms informally agreed to a plan that would give six board seats to the Chicago Board of Trade and Chicago Mercantile Exchange, while reserving six for firms, the sources said. Two public directors and the chief executive of the clearing organization also would serve.
The developments represent the most progress ever in the long debate over common clearing in Chicago.
Trading firms have argued that combining the separate systems used at the Merc and Board of Trade would save millions of dollars each year. Before now, talks to unify the systems have never progressed beyond the issue of control.
Clearing systems guarantee trades and ensure that member firms maintain enough capital to cover obligations.
The breakthrough came when the Futures Industry Association, a trade group dominated by big trading firms, dropped a demand that exchange board appointees hail from big firms, the sources said.
Negotiators also agreed to adopt the Merc’s Clearing 21 software, if it passes a consultant’s review, the sources said.
“We made a lot of progress,” said Chris Hehmeyer, chairman of the Board of Trade Clearing Corp., who participated in the session. “There is a lot of momentum.”
Still, key differences remain. Trading firms want the new organization to clear and guarantee over-the-counter products only after a two-thirds vote. The Board of Trade won’t go along, fearing that competing firms would block its plan to trade cash-market U.S. Treasury bonds and other products.
The negotiators agreed to meet again in a few weeks to hash out remaining details. “I have never been more optimistic,” said Merc Chairman Jack Sandner.
In other developments Tuesday, the Board of Trade and Merc vowed to fight a Commodity Futures Trading Commission proposal to ban dual trading in active pits.
The agency contends that exchange audit-trail and surveillance systems are inadequate to detect abuses of dual trading, when brokers trade for their own accounts while also filling customer orders.
The Merc and Board of Trade say their audit trails are good enough. Dual trading helps customers, said CBOT Chairman Patrick Arbor. “It brings liquidity into our markets,” he said. “Everywhere you look, you see a CFTC bent on doing things against the interest of the Board of Trade.”
