CME Responding To Challenge By NYSE Liffe On Interest Rate Futures Trading

NYSE Liffe Chairman James McNulty, right, a former CME chief executive, helped devise the new margin approach, and former CBOT CEO Bernard Dan threw his support behind it this month, joining the board of New York Portfolio Clearing LLC, the exchange's clearinghouse.

The savings to traders “could range in the billions of dollars,” says Walt Lukken, NYPC's CEO and a past acting chairman of the Commodity Futures Trading Commission.

Just weeks after regulators approved the lower-margin arrangement, CME last month announced a plan to reduce margin requirements for certain members.

“This is about responding to the competitor,” says Derek Sammann, CME's managing director of interest rate and foreign exchange products.

Yet CME's plan is being questioned by New York credit ratings agency Standard & Poor's Financial Services LLC, which on March 3 said it needs more information on whether the plan will reduce financial safeguards and to assess NYSE Liffe's threat to some of CME's “most important listed products.”

Other start-up exchanges have tried to challenge CME and failed, but NYSE Liffe's effort is different because it isn't trying to compete on fees, where the savings are too small to make a difference, Chicago-based Morningstar Inc. analyst Michael Wong says. Attracting traders will be key, he says.

DRW, hedge fund Citadel and Getco invested in NYSE Liffe because they want competition in the futures market and “have a natural incentive to want to see us succeed,” says Tom Callahan, CEO of the exchange.

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UPDATE 1-CME on the offensive in challenge to Liffe's rates