ELX Liquidity Exchange, the startup that plans to challenge CME Group Inc.’s dominance in financial futures, is in final negotiations with Chicago-based Clearing Corp. for the critical job of guaranteeing its contracts, three people familiar with the talks say.
The impending clearinghouse agreement is the first concrete sign after months of silence that ELX, whose owners include Wall Street banks such as Citigroup Inc. and Chicago hedge fund Citadel Investment Group, is nearing a launch. ELX may officially announce the deal as early as next week, the sources say.
ELX is expected to take additional steps, including naming a CEO and filing an application with the Commodity Futures Trading Commission, the nation’s futures regulator, in the next few weeks, they say, adding that trading is expected to begin in the third or fourth quarter.
Essential to any futures exchange, a clearinghouse is responsible for settling trading accounts at the end of each day, financially backing trades and maintaining margin balances. ELX is choosing Clearing Corp. over three rivals that included Chicago-based Options Clearing Corp.
Now comes the hard part for ELX, formed in December with plans to offer futures based on U.S. Treasuries. To date, at least four exchanges have tried to take on CME or its recently acquired former rival, the Chicago Board of Trade, by offering identical, competing contracts. None have succeeded. CME currently accounts for more than 90% of U.S. futures trading.
Satish Nandapurkar, the former CEO of one-time CBOT rival Eurex US, gives the new venture “significantly less than a 50-50 chance” of competing in Treasury futures. In February 2004, Eurex US started Treasury futures trading but never managed to win much business, in part because the CBOT slashed its fees just before the new market’s launch.
ELX’s 12 owners — which also include Merrill Lynch & Co., three Chicago-based trading firms and electronic bond-broker BGC Partners Inc., formerly known as eSpeed Inc. — believe they’ll fare better than prior attempts.
“One important difference is we have an equity stake in the venture,” says Misha Malyshev, a managing director at Citadel and global head of its high-frequency trading desk. “We believe this is the right mix of players and they are incentivized to create a successful, long-term enterprise.”
Traders may also migrate to ELX because they watched the CBOT raise its fees once the threat from Eurex dissipated. “People realize there needs to be a legitimate and lasting competitive alternative,” says Faraz Javaid, Citadel’s director of new business development.
CME CEO Craig Donohue says he takes the potential competition “very seriously” and declines further comment. An ELX spokesman said no ELX directors were available to comment. A Clearing Corp. spokesman declines to comment.
ELX directors are in active talks with at least two CEO candidates and have chosen one of their own to be the market’s president; appointments will be announced in the next few weeks, two people involved with ELX said.
An agreement with ELX may provide a boost for Clearing Corp., which has about 40 employees at its 227 W. Monroe St. offices. Formerly known as Board of Trade Clearing Corp., its business has shrunk after the Board of Trade switched its clearing business to the CME, which runs its own clearinghouse. The CME bought the CBOT for $12 billion in July.
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