CME defends end-of-day settlement rules

Reuters / CME Group Inc. chief executive Phupinder Gill on Nov. 1 denied that the exchange operator changed its settlement rules to give electronic grain traders an advantage over veterans of the Chicago trading floor, who have sued the company, saying its new rules are killing their business.

Gill testified as the trial opened in a lawsuit filed by traders who work in the open-outcry pits on the Chicago Board of Trade’s 140-year-old agricultural trading floor. They sued CME in June 2012 to halt new end-of-day settlement rules that factored in transactions executed electronically, where most of the volume takes place.

Prior to the change, CME had a century-old tradition of settling futures prices for crops like corn and soybeans based on transactions executed in the pits. CME, the largest U.S. futures market operator, owns the CBOT.

The settlement methods were changed “to reflect where the activity took place,” in electronic markets, Gill said in response to a question by the plaintiffs’ attorney on the first day of a trial over the rules in Chicago.

The U.S. Commodity Futures Trading Commission, which oversees CME and the CBOT, expressed concerns about the practice of basing end-of-day settlement prices solely on open-outcry activity, he told Cook County Circuit Court Judge Jean Prendergast Rooney.

Open-outcry traders have argued CME should not have implemented the new methods without a vote of approval by a majority of certain holders of CBOT memberships.

The lawsuit represents the last stand for traders on the floor, who traditionally did much of their business at the close of trading and say the new procedures are making the pits irrelevant.

Anthony McKerr, a plaintiff in the case and a trader in CBOT’s corn futures pit, testified that his income had dropped more than 80 per cent because of the revised rules.

Before the change, floor traders had already seen business dwindle during the past seven years as a vast majority of trading has migrated to electronic platforms.

Lawyers for CME said it did not need members to vote on the settlement rules. And the new methods did not encourage customers to trade in electronic markets as opposed to the pits, said Al Hogan, a lawyer representing the exchange operator.

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