U.S. Futures Exch., LLC v. Bd. of Trade of Chi., Inc.
| Citation | 346 F.Supp.3d 1230 |
| Decision Date | 31 October 2018 |
| Docket Number | No. 04 C 6756,04 C 6756 |
| Parties | U.S. FUTURES EXCHANGE, LLC and U.S. Exchange Holdings, Inc., Plaintiffs, v. BOARD OF TRADE OF the CITY OF CHICAGO, INC. and Chicago Mercantile Exchange, Inc., Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
Scott T. Schutte, Kirsten Ann Milton, Romeo S. Quinto, Tinos Diamantatos, Kenneth Michael Kliebard, Morgan Lewis & Bockius LLP, Chicago, IL, Michelle Park Chiu, Pro Hac Vice, Herman J. Hoying, Pro Hac Vice, Kent M. Roger, Pro Hac Vice, Lorraine M. Casto, Pro Hac Vice, Minna Lo Naranjo, Pro Hac Vice, Sujal J. Shah, Pro Hac Vice, Morgan, Lewis & Bockius LLP, San Francisco, CA, Brian M. Hom, Pro Hac Vice, Morgan, Lewis & Bockius LLP, Los Angeles, CA, Jonathan M. Rich, Scott A. Stempel, Pro Hac Vice, Thomas G. Scriven, Pro Hac Vice, Tonya Esposito Oliver, Morgan Lewis & Bockius, Washington, DC William P. Quinn, Zachary M. Johns, Pro Hac Vice, Richard Brendan Fee, Pro Hac Vice, David W. Marston, Jr., Morgan, Lewis & Bockius, Philadelphia, PA, for Plaintiffs.
Jerrold E. Salzman, Albert Lee Hogan, III, Gretchen Maria Wolf, Lindsey Jane Sieling, Laura Bernescu, William Elliott Ridgway, Skadden, Arps, Slate, Meagher & Flom, Amanda Lauren Brown, Elizabeth Anne Simon, Skadden Arps, Chicago, IL, Jason T. Manning, Hodges, Loizzi, Eisenhammer, Rodick & Kohn, Arlington Heights, IL, Jonathan L. Marcus, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, for Defendants.
Plaintiffs U.S. Futures Exchange, LLC ("USFE") and U.S. Exchange Holdings, Inc. ("UEH") bring this antitrust case against defendants Board of Trade of the City of Chicago, Inc. ("CBOT") and Chicago Mercantile Exchange, Inc. ("CME").1 Plaintiffs allege that defendants engaged in anticompetitive conduct to block plaintiffs from successfully entering the U.S. Treasury futures and options exchange market. Pending before the Court are: (1) defendants' motion for summary judgment [708]; and (2) plaintiffs' motion for partial summary judgment [712]. For the reasons that follow, the Court grants defendants' motion [708]. The Court denies plaintiffs' motion for partial summary judgment [712] as moot.2
In the 1970s, CBOT created and launched what later became its flagship product: futures contracts on U.S. Treasury notes and bonds. Futures and options contracts can be traded in the United States only on an exchange like CBOT that is approved by the U.S. Commodity Futures Trading Commission ("CFTC") as a designated contract market. R. 742 ¶ 1 (Defendants' Response to Plaintiffs' L.R. 56.1 Statement of Additional Facts).
In the 1990s, UEH's parent Eurex Frankfurt AG ("Eurex") developed an all-electronic trading exchange in Europe. Id. ¶ 4. CBOT licensed Eurex's electronic trading platform in October 1999, and the parties signed a non-compete to prevent Eurex from, among other things, offering U.S. Treasury futures itself. Id. ; R. 731 ¶ 6 (Plaintiffs' Response to Defendants' L.R. 56.1 Statement of Facts). The parties entered into a new license agreement in July 2002. R. 731 ¶ 6. That agreement was set to expire on December 31, 2003, and the non-compete was set to expire on January 30, 2004. Id. In early January 2003, CBOT notified Eurex that it intended to terminate the license agreement the day it was set to expire (December 31, 2003). R. 742 ¶ 5.
Both CBOT and Eurex made public announcements on January 10, 2003. R. 731 ¶¶ 6-8. CBOT announced that it had entered into a contract to use a different trading platform after December 31, 2003 when its licensing agreement with Eurex expired. Id. ¶ 7. And Eurex announced its intent to launch a U.S. Treasury futures and options exchange, USFE, to compete head-to-head with CBOT. Id. ¶¶ 2, 8. The planned launch date for Eurex's competing exchange was February 1, 2004, the earliest date possible under the non-compete agreement. Id. ¶¶ 6, 8.
While planning for its U.S. launch, Eurex created a business case defining the two most likely outcomes as: (1) winning the entire futures market by 2007; or (2) failing and quickly exiting from the market. Id. ¶ 9. The business case assumed a "binary outcome" was most likely because "the nature of ... the futures business is that [in] any one product, there is a tendency to concentrate the market or liquidity into one market." Id. Eurex cited "the ‘network effect’ of CBOT's large volume" as a "barrier to entry" into the U.S. Treasury futures market. Id. ¶ 10. In a March 17, 2003 presentation, Eurex assessed the probability of USFE's success at "10%, however increasing to 50% if achieving mile-stones." Id. ¶ 11. Defendants' executives readily acknowledged the business threat posed by USFE's planned entry into the market, including in light of Eurex's low-cost, all-electronic trading platform (which market participants were familiar with, having used it during the years that CBOT licensed it). R. 742 ¶¶ 6, 8, 16.
All futures contracts and options traded on an exchange must be submitted to a clearinghouse for clearing. Id. ¶ 1. A clearinghouse is a financial institution formed to facilitate the exchange of transactions. It stands in between the two firms participating in a trade and guarantees all trades it clears, and its purpose is to reduce the risk of a firm failing to honor its obligations. Eurex and CBOT separately began negotiations with two clearinghouses for their competing exchanges: (1) defendant CME; and (2) the Board of Trade Clearing Corporation ("BOTCC"), which was CBOT's prior clearinghouse. R. 731 ¶¶ 12-13. BOTCC was an independent corporation not owned by CBOT.
During CBOT's negotiations with BOTCC, CBOT requested that BOTCC act as an exclusive clearinghouse for CBOT's key products, including U.S. Treasury futures and options, but BOTCC was resistant. R. 742 ¶ 24. Prior to this, CBOT and BOTCC never had a written agreement, and there was no restriction on BOTCC's ability to provide clearing services for other exchanges. Id. CBOT encountered less resistance in its request for exclusivity from CME. Id. ¶ 25. In a March 25, 2003 email summarizing the negotiations, CBOT explained: R. 733 Ex. 145.
From the time the buyer or seller of a futures contract opens the contract until the counter-party closes it, the contract is considered "open." Contracts that are outstanding at the clearinghouse—i.e. , that have not been offset by delivery—are called "open interest." See R. 742 ¶ 1. As part of CBOT's negotiations with CME, they debated whether a bulk transfer of open interest from BOTCC to CME would be possible as part of a CBOT-CME agreement. Id. ¶ 27. Defendants understood that "interjecting CFTC into the process" by submitting rules for "approval of the CFTC" could reduce risk and "act[ ] as an insulator against liability." Id. ¶ 28.
Defendants began discussions about this with the CFTC in April 2003. R. 731 ¶ 18.
On April 16, 2003, CBOT entered into a clearing services agreement ("clearing link") with CME set to begin on January 2, 2004. R. 742 ¶ 25; R. 731 ¶¶ 13-14. Under that agreement, CME could provide clearing services for products competing with CBOT products only after first giving 30 days' notice to CBOT, at which time CBOT had the right to terminate the agreement. R. 731 ¶ 14. Although this provision was not framed in terms of exclusivity, construing emails in the light most favorable to plaintiffs supports an inference that defendants had an internal understanding that CME would grant CBOT exclusivity. R. 742 ¶ 25. CBOT subsequently attempted to acquire BOTCC, but BOTCC refused CBOT's acquisition overture. Id. ¶ 26.
On May 20, 2003, USFE and BOTCC signed a letter of intent to enter into a clearing services agreement. R. 731 ¶ 16. The parties dispute the extent to which USFE was already committed to or leaning towards BOTCC at the time defendants announced their clearing link. R. 731 ¶¶ 15-16; R. 742 ¶ 25. USFE and BOTCC's plans raised a concern for defendants that if USFE gained access to BOTCC before open interest was transferred to CME, "CBOT's customers could effectively become Eurex US customers without the need to change any clearing procedures." R. 742 ¶ 27.
Defendants' clearing link agreement required them to "draft and submit to the CFTC for approval rules that provide for the clearing of CBOT products at the CME clearing house ... and facilitate the transfer of open interest in CBOT [p]roducts from BOTCC to CME." R. 731 ¶ 17. On June 3, 2003, CME submitted a request for the CFTC to approve proposed rules to implement the clearing link. Id. ¶ 19. On June 13, 2003, CBOT submitted a request for the CFTC to approve a proposed rule ("Regulation 701.01") requiring transfer of CBOT members' open interest from BOTCC to CME. Id. ¶ 20; R. 742 ¶¶ 28, 32; R. 733 Ex. 162.
Although the CFTC had no obligation to publish these rule submissions or to provide an opportunity for public comment, on July 8, 2003, the CFTC made defendants' proposed rule changes available for comment on the CFTC website by July 14, 2003. R. 731 ¶ 21; R. 742 ¶ 29. This was far shorter than that 45-day review period allowed (but not required) by a commission rule. R. 742 ¶ 29. CBOT had requested quick CFTC approval of the proposed rules in June 2003, citing a provision in the clearing link agreement allowing CME to walk away from the agreement by July 15, 2003. Id . However, CME's Board Steering...
To continue reading
Request your trial