A Chicago federal appeals panel has ruled the Chicago Board of Trade and the Chicago Mercantile Exchange did not breach antitrust law 16 years ago, by allegedly trying to improperly scuttle a trading firm's electronic trading platform with a flood of regulatory objections.
The appeals judges found the objections were not frivolous.
The March 23 ruling was laid down by Circuit Judge Daniel Manion, with agreement from Circuit Judges Michael Kanne and Michael Brennan of the U.S. Seventh Circuit Court of Appeals.
The ruling favored the CBOT and CME in a suit by the U.S. Futures Exchange (USFE), a Chicago firm that went out of business in 2008. The case was filed in October 2004 in U.S. District Court for the Northern District of Illinois, and has gone through multiple amended complaints, motions and briefings, as well as two district judges.
USFE said it planned to introduce on Feb. 1, 2004 a then-novel electronics-based trading platform. The Feb. 1 date was key, because it gave USFE one month to get established before a number of futures and options contracts expired on March 1. At that time traders could transfer business to USFE, according to USFE.
USFE’s initiative had to be approved by the U.S. Commodity Futures Trading Commission, but USFE alleged the CBOT and CME delayed approval by one week with a blizzard of groundless objections.
In addition, defendants allegedly conspired to deprive USFE of liquidity by suggesting a rule, which the commission implemented, that forced transfer of the Chicago Board of Trade's outstanding trades and contracts from the Board of Trade Clearing Corporation to its new clearing partner, the Mercantile Exchange. This rule "deprived USFE of access to a significant amount of liquidity," according to court papers.The Board of Trade Clearing Corporation is a middleman between buyers and sellers. Every futures exchange must have a clearinghouse.
The one week delay caused uncertainty among traders who ended up not using the new exchange, causing the exchange to fall flat, according to USFE. Defendants breached antitrust law by improperly interfering with trade, USFE alleged.
District Judge Thomas Durkin granted summary judgment for the CBOT and CME, leading USFE to appeal.
Judge Manion concluded Durkin was right to toss the suit.
"Defendants’ December 2003 scheduling letters persuaded the Commission to postpone the public hearing on USFE’s application in light of legitimate and well-documented conflicts. The letters were not frivolous. Neither were Defendants’ objections to USFE’s application. Before granting USFE’s application, the Commission held USFE to several remedial efforts it undertook in response to Defendants’ objections regarding USFE’s proposed one-member board, cross-border clearing link, and incentive programs," Manion pointed out.
Manion further noted the commission did not acknowledge many of the objections raised by other commentators, but did address each of defendants’ 54 concerns.
"This speaks to the substantiality of Defendants’ submissions, even those rejected by the Commission," Manion said.
USFE argued the ultimate success of their application to the commission was evidence the objecting petitions were baseless, but Manion would have none of it.
"Even if petitioners believe a regulator may ultimately approve an application, that does not eliminate their right to encourage the governing body to consider shortcomings in the application. Proving sham petitioning in a legislative context like this one is virtually impossible, and the record does not meet that high bar," Manion determined.
Manion added defendants also enjoy immunity, because they were legitimately taking part in the governmental process. Manion said immunity also applies to the allegation defendants wiped out USFE's liquidity, through the rule defendants suggested, because the commission, not defendants, adopted the rule.
USFE is represented by Philadelphia-based Morgan, Lewis & Bockius.
The Board of Trade and the Mercantile Exchange are defended by Skadden, Arps, Slate, Meagher & Flom, based in New York, and Hodges, Loizzi, Eisenhammer, Rodick & Kohn, of Arlington Heights.