The former head of the Commodity Futures Trading Commission said the U.S. should reevaluate the fundamental structure of its futures markets to foster more competition among exchanges.

Walter Lukken, who led the CFTC as acting chairman until earlier this year, said that while the current model has encouraged innovation, it also produced a market where Chicago-based CME Group Inc. (CME) controls 96% of U.S. futures trade.

"That market isn't competitive," said Lukken, who joined CME rival NYSE Euronext (NYX) in July as senior vice president of global market structure.

"We need a way to get the [futures market] model to be more competitive, but we can't necessarily apply the same model as in the securities industry due to differences in products," he said.

Lukken's comments, on the sidelines of a derivatives industry event in Interlaken, Switzerland, echo similar calls last week at a Washington hearing focused on harmonizing U.S. securities and futures regulation.

At issue is a practice known as fungibility, wherein investors can put on a position at one exchange and take it off at another.

Cash equities and options contracts are fungible, but futures contracts are not - U.S. law lets futures exchanges operate their own clearinghouses, thereby requiring traders to buy and sell futures contracts on the same exchange.

Current CFTC Chairman Gary Gensler has refused to say where he stands on the issue of fungibility in futures markets.

However, he is proposing a new market model for over-the-counter derivatives, in which standardized swaps must be able to be cleared at multiple clearinghouses.

Lukken acknowledged basic differences between cash securities issued by corporations and futures contracts, designed by exchanges to hedge risk.

"Being innovative and forward-thinking should be rewarded in the [futures] sector," he said.

The fungibility issue arose during Lukken's 18-month tenure as acting CFTC chairman when a Justice Department memo scrutinizing CME's vertical integration of clearing became public in January 2008.

CME shares dropped as investors feared a forced spinoff of its profitable clearing division, but the issue faded and the exchange operator was allowed to proceed with its acquisition of the New York Mercantile Exchange.

New competitors have also appeared since then: NYSE Euronext launched its U.S. futures platform last fall, while the consortium-backed ELX Futures debuted in July. Both are targeting Treasury-linked derivatives, one of CME's core markets.

While Neal Wolkoff, CEO of ELX, has called for fungibility in U.S. futures, Tom Callahan, NYSE Euronext's U.S. futures chief, said it isn't the way to resolve the competition issue.

"You'd put the U.S. market at risk because the rest of the world doesn't operate that way," Callahan said in a recent interview. "And you could potentially really hurt liquidity by applying something of that nature to a very healthy market."

Danger of 'Trade War' Seen In Tighter Regulation

Lukken also warned that U.S. regulators must tread cautiously as they look to assert their authority overseas.

"There is tension, that if you go too far, you create a sort of trade war," he said. "That's where things start to break down."

The CFTC last month again tweaked a three-year-old agreement with the U.K. Financial Services Authority, giving the U.S. agency greater power over certain London-based markets operated by IntercontinentalExchange Inc. (ICE).

Through its ICE Futures Europe unit, the exchange offers electronic trade in products linked to energy futures contracts listed in the U.S.

The FSA has cooperated with the CFTC in its ongoing efforts to close the so-called "London loophole," which critics say has allowed U.S. traders to avoid position limits by trading look-alike contracts on ICE Futures Europe.

On Thursday, Lukken suggested that there may be a limit to that cooperation.

"We haven't reached that point yet, but that's something regulators have to be concerned about," he said.

-By William Launder, Dow Jones Newswires; +49 69 29 725 515; william.launder@dowjones.com; and Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

(Sarah N. Lynch contributed to this article.)