Billionaire Howard Lutnick will this week make a third assault on CME Group’s interest rate futures dominance, with the high stakes at play demonstrated by a lively trade in barbs between the New York-based trader and the Chicago exchange’s veteran head, Terry Duffy.
Lutnick’s BGC Group will debut trading in rate futures on his FMX venue in a direct assault on one of the biggest fortresses in global financial markets: CME’s hold on futures on US rates and government debt.
Backing him are a group of banks and trading firms including Goldman Sachs, JPMorgan and Citadel Securities.
For CME, Lutnick’s move represents a potential threat to its profits. The Chicago group’s interest rates complex is its biggest revenue producer, accounting for 28 per cent of its $5.6bn turnover last year. CME handled more than 11mn contracts a day of Treasury and short-term rate futures last month.
But the group’s share price has been sputtering and this year it lost its long-held crown as the world’s most valuable exchanges group to US rival Intercontinental Exchange. Even so, its market capitalisation of $77bn dwarfs BGC’s $4.8bn.
“The FMX launch is something investors are very, very focused on. One of the reasons I think you’ve seen CME’s stock underperform its peers recently is because of the FMX overhang and the competitive threat that it presents,” said Patrick Moley, senior research analyst at Piper Sandler.
BGC’s long-trailed launch has also led to a public spat between Lutnick and Duffy, who has even invoked a threat to US regulators to ward off the interloper.
Lutnick, who first shook up the entrenched, phone-dominated world of bond markets with the creation of the electronic eSpeed marketplace in the late 1990s, says he has learned from previous failures when he did not have the support or infrastructure behind him.
He has been bullish in his frequent appearances on financial TV channels and points to BGC’s capture of a 30 per cent market share in sophisticated dealer-dominated Treasury bond trading — most of it from CME.
“No one else has ever said they got a glove on the CME. To me, 30 points market share sounds like a glove,” Lutnick told CNBC in July, describing CME’s interest rates and Treasury futures contracts as “a perfect monopoly”.
Duffy swiftly responded on the same business TV channel. “I’m not just going to sit idly by while he talks about these numbers and how his percentages are growing, and we’re this great monopoly that he’s going to come after and disrupt. It’s false,” he said.
The row threatens to spill over to Washington. Lutnick last month was named co-chair of former president Donald Trump’s transition team, and is a donor and fundraiser for the Trump campaign.
Duffy, who began his career in the Chicago trading pits in 1981, has also warned politicians and policymakers of a potential threat to US taxpayers.
FMX will clear its futures at LCH, the clearing house controlled by the London Stock Exchange Group, which handles more than $162tn of US dollar swaps.
Clearing houses are a crucial link in futures markets, as they can drastically cut overall trading costs by netting the margin, or insurance, traders must post to backstop their deals.
Market participants expect this quirk of financial markets plumbing to be the crucial difference between success and failure. Moley estimates CME customers collectively make savings of around $7bn from posting around $37bn of collateral for swaps.
“If all else is equal, and you’re getting very large margin savings, it would make all the sense in the world to play in FMX’s futures,” said Tucker Dona, head of business development for Baton Systems, a post-trade processing specialist. “But it will all depend on liquidity. If there’s no liquidity, it’s not going to get going, even with some margin offset.”
Last week CME said that trading volume and open interest — a gauge of the depth of a derivatives market — in its Sofr interest rates contracts reached record levels ahead of the Federal Reserve’s bumper cut.
Duffy has taken issue with the clearing potentially taking place in London. In the summer he cited the Bank of England’s oversight of the London Metal Exchange, which in 2022 controversially ripped up $12bn of nickel futures, erasing outsized losses as well as gains, after what the LME said were “disorderly” moves in the metal’s soaring price.
“What happens if that happens to US sovereign debt? What does that mean for the American taxpayer?” he said at the time.
“Permitting offshore clearing of US sovereign debt futures under the jurisdiction of a foreign regulator is a practice the US has never before approved,” said Duffy in a statement in response to the Financial Times.
The CME boss also warned that offshore clearing risked potential disruptions to the futures market — without specifying how — which could in turn raise the cost of US borrowing if hedging became more difficult.
BGC, the Cantor-controlled business that owns FMX, has hit back at the accusations, beginning an earnings call by flatly denying it was seeking to clear cash Treasuries in London and pointing out its clearing for Treasuries is identical to CME’s arrangements.
LCH said it has been regulated by the Commodity Futures Trading Commission, the main US derivatives regulator, since 2001 and that it was required to hold collateral for US futures customers in the US. LCH did not comment on the location of clearing for FMX.
