CME revamps fee rebates for energy trading

CME Group, owner of the world's largest futures exchange, has launched a sweeping revamp of its opaque system of fee rebates for energy traders as it battles flagging volumes in oil and natural gas contracts.

The new incentives replace a hotchpotch of perks with a uniform programme that sweetens traders' rebates as their volumes surpass certain thresholds. Only the biggest high-frequency trading firms are likely to qualify for the most generous rebates, people familiar with the matter said.

CME's new incentives, which took effect last week [September 1], apply to energy futures created as many as three decades ago: crude oil, natural gas, diesel and gasoline. Energy has the second largest share of the exchange's $2.5bn clearing and transaction fee revenue, comprising 23 per cent of the total last year.

According to people who have seen the rebate programme details, proprietary trading groups would fall into one of eight tiers based on their average daily volumes in the energy products.

Transactions of at least 150,000 contracts per day would place a trader in the top tier, eligible for $0.45 rebates from the standard $0.55-per-contract member trading fee. Top rebates could exceed $16m annually, assuming a normal trading calendar.

The changes come nine months after CME raised trading fees. Volumes in the four energy contracts have declined in the year to August.

Some traders praised the programme's consistent criteria for rebates and a person close to CME said the new incentives level the field.

However, others raised concern it would concentrate the market. "They are trying to incentivise people to trade more," said an oil trader. "What they're going to end up with is quite possibly fewer, but bigger, traders".

CME said: "We regularly review programmes relative to market and other developments and may modify program components or structures in an attempt to respond to those developments."

Rebates are a common way to build volume in new futures contracts. But they have recently caught the eye of the US Commodity Futures Trading Commission, which is reviewing how they work and who receives them.

Virtu Financial, an electronic trading firm, disclosed this year that the futures commission was looking into its participation in some exchange incentive programmes. Virtu declined to comment.

The exchange operator has kept details of the programme private, requesting an exemption from disclosure requirements when it informed regulators of the plan.

Some traders say scarcity of public incentive information at CME and rival IntercontinentalExchange fosters suspicion certain parties get better deals.

"How transparent should we require the exchanges to be about the types of participants that are actually reaping benefits and the amount of proceeds that are being paid as part of these market-maker incentive programmes?" Vince McGonagle, CFTC market oversight chief, asked at a recent public meeting.

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