Nymex, CME against competition: US

The CME Group and Nymex Holdings fell a record 18 per cent in New York trading after the Justice Department said the futures exchanges' trade-processing practices may be anti-competitive.

CME, the world's largest futures market, dropped $103.55 to $485.25 in New York trading, and Nymex, owner of the biggest energy market, sank $18.78 to $87.88.

Financial futures markets such as CME that clear their own trades may pose a barrier to competitors, Justice's antitrust division said in a legal brief released yesterday. The opinion resulted from a regulatory review initiated last year by US Treasury Secretary Henry Paulson.

"The goose that lays the golden egg is under attack by the regulators, and that is never good news," Brad Hintz, an analyst at Sanford C Bernstein & Co in New York, said. Forcing companies such as CME to change structure would end their "monopolistic" pricing advantage "and margins would decline," Hintz wrote in a note to investors on Thursday.

CME's drop was the steepest since the company went public in December 2002 and Nymex's was the biggest since the company's 2006 initial public offering. Atlanta-based Intercontinental Exchange Inc, owner of Europe's largest energy market, slid $8.75, or 7 per cent, to $115.90.

The federal opinion may also hinder CME Group's plan to acquire Nymex. CME Group said last week it had entered into exclusive talks to buy the New York Mercantile Exchange.

The deal would face the Justice Department's review and approval and could lead to the combination of the transaction-processing businesses at CME and Nymex, the top two US futures clearinghouses.

The share drop has erased about $1.7 billion from CME's bid for Nymex. CME is offering 0.1323 of its shares plus $36 cash for each Nymex share, valuing the deal at about $9.3 billion. The transaction was worth $11 billion when announced on January 28.

In a statement issued on Thursday, CME said that Congress "appreciated the merits of a free market solution to the organisation and ownership of clearing houses'' when it passed the Commodity Futures Modernization Act of 2000, which grants the Commodity Futures Trading Commission the authority to regulate futures exchanges.

The company said Congress "rejected suggestions that clearing houses be taken from exchanges and converted into user-owned utilities."

The DOJ opinion was ``troubling on several counts,'' CFTC Commissioner Bart Chilton said in a statement on Thursday. "The Treasury Department requested comment on regulatory oversight issues; DOJ staff's response, however, is an editorial commentary on futures market business practices,'' Chilton said.

Chilton noted that the Justice Department didn't raise issues of clearing structure when it approved the acquisition of the Chicago Board of Trade by the Chicago Mercantile Exchange last year.

"The DOJ staff letter has, unfortunately, roiled the markets; this is precisely the kind of behavior that government regulators are supposed to take ordinary care and attention to avoid,'' Chilton said.

The Justice Department's concerns are centered on financial futures exchanges such as CME Group that own their own clearinghouses, and not on energy markets, the opinion said.

Nymex said that market-driven regulation is best and that its clearinghouse structure has been approved by federal authorities for more than a century.

"By avoiding a `one-size-fits-all' model, Congress has instead provided for substantial flexibility in how companies may organise their businesses and still comply with regulatory requirements,'' Nymex said in a statement issued on Thursday.