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CME, traders fight over settlement method

06/26/2012 @ 7:00am

CME Group Inc. (CME) forged ahead Monday with a new process for calculating closing prices for its benchmark grain markets, while a last-minute legal challenge by floor traders contesting the changes confronted hurdles.

A U.S. district court judge on Tuesday will hear arguments from CME and traders regarding the matter after lawyers for CME on Monday requested that the issue be handled in federal rather than state court, putting off any decision on postponing the changes.

The futures exchange group on Monday afternoon implemented the changes that are the focus of the protests, which are designed to reflect electronic trading activity in the closing price of CME's benchmark contracts on corn, soybeans and wheat.

The move, in the works since late 2011, involves using volume-weighted prices from both open-outcry trading in CME's Chicago pits as well as business on the company's electronic trading platform Globex.

"We believe the new settlement methodology accurately captures contract value across both the open-outcry and electronic trading venues during the settlement period and is fully consistent with our functions as a designated contract market and a derivatives clearing organization," said a spokesman for CME in a statement Monday, who confirmed that the new methodology was used to formulate Monday's settlement prices.

A group of traders on Friday filed a lawsuit in Illinois's Cook County Circuit Court seeking to block the move, which arrives as CME has broadened trading hours for its agricultural markets in response to competition from rival electronic markets. CME declined comment on the litigation.

A group of 24 traders and brokers that do business on CME's Chicago floor sought a court order that would block the planned changes, alongside monetary damages. The group charged that incorporating electronic trading activity into the grain markets' closing prices, followed by farmers, food companies and financial firms around the world, would harm the standing of the floor traders that have long fulfilled the function on their own.

The move also violates the brokers' contractual rights as members of CME's exchange, according to George Sang, the attorney representing the group. He said that CME did not secure the necessary support for making the shift.

CME's request for the matter to go before a federal judge delayed the process, Mr. Sang said Monday. He said the jurisdiction of the matter would be argued Tuesday morning.

Brokers who helped organize the legal challenge were absent from CME's floor on Monday, according to traders.

When CME first detailed the planned changes in December, floor traders complained, arguing that settling contract prices on the basis of pit business was one of the major factors keeping floor traders active in those markets, while their numbers have shrunk in pits dealing financial futures. Proponents of electronic trade said the move made sense, given that much more business is now traded via screens than the physical floor, and closing prices should reflect the migration.

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