LONDON: By revealing recently that it would "gradually scale back" the marketing of its eurodollar interest rate futures contract in the US, Euronext.Liffe was -- without saying so explicitly -- admitting that its assault on the Chicago Mercantile Exchange had failed.
It sounded all too familiar. In June, Euronext.Liffe's rival Eurex conceded defeat in its attempt to take on the Chicago Board of Trade by saying it would stop funding US Treasury futures contracts.
The developments mark sweet victory for Chicago's two futures exchanges.
But they have also started to raise concerns in the derivatives industry that, with European competition withering in the US, the Chicago exchanges no longer have an incentive to keep transaction prices low.
Moreover, the US Futures Industry Association warned recently legislators that US futures exchanges might now have too much influence over rules governing futures trading due to their wide self-regulatory powers.
Both Chicago exchanges are consolidating a shift away from member-owned clubs to being publicly held profit centres. This points to fees rising, after a period of fee cuts aimed at heading off the challenges from Europe.
Indeed, the CME last month raised fees for the first time in more than a year. The CBOT next month will raise fees for some Treasury futures contracts by up to 50 per cent -- the first rise in at least three years.
Bernard Dan, chief executive, said pricing "remains highly competitive". The CBOT, heavily loss-making until two years ago, points out that technology and new products require expensive investments.
However, industry participants on both sides of the Atlantic remain sceptical.
Earlier this month, Alan Yarrow, chairman of the London Investment Banking Association, warned European exchanges must introduce fee cuts or face being referred to market watchdogs.
Recent unsuccessful talks between the CME and CBOT about a merger exacerbated such concerns in the US, where the two Chicago exchanges are a de facto duopoly in financial futures.
Richard Berliand, global head of futures and options at JPMorgan, says: "We are now at the point where we have duopoly marketplaces in both [geographic] regions for financial futures and to go to a monopoly situation will increase what is already perceived to be excessive pricing power."
John Damgard, FIA president, warned that the "self-certification" powers of US exchanges -- by which they can change rules governing the way products are traded or cleared before submitting them to the regulator -- was out of kilter with current market conditions.
He said that the regulator, the Commodity Futures Trading Commission (CFTC), had no way to judge whether a rule change by an exchange was aimed at preserving an exchange's competitive advantage over a rival than maintaining the integrity of its business.
He urged US legislators to consider whether reforms were needed to the CFTC's mandate to ensure "that no exchange is gaming the system to achieve an unfair competitive advantage".
Such concerns stem partly from a controversial decision taken by the CFTC in 2003, only months before Eurex launched its challenge against the CBOT.
The CFTC allowed the shifting of "open interest" lodged at the CBOT's former clearing house to a new arrangement struck between the CBOT and CME, under which the CBOT would use its former rival's clearing house.
Open interest is trades left open at the end of a trading day, possession of which is crucial to maintaining liquidity, or trading volume.
By approving the "rule changes" submitted by the CBOT and CME on their new clearing arrangement, the CFTC effectively deprived Eurex of any open interest at its new US clearer, which was in the midst of switching its business from the CBOT to Eurex.