ANALYSIS: CME discusses emerging US Treasury futures rivalry

Speaking on Wednesday, exactly one month since BGC Group launched FMX Futures into direct competition with CME, the exchange group’s senior management said they are monitoring the new market’s progress while continuing to focus on delivering savings to clients.

Terry Duffy, chief executive and chairman of CME Group, said on an analysts’ call in response to a question about FMX Futures: “The volumes have been modest but it’s early so I’m not drawing any conclusions. We will continue to stay focused on the things that we are doing today … which are the efficiencies that we have been able to create for our clients.”

Duffy’s comment came after he and his team reported third quarter revenue up 18% driven by higher trading volumes and open interest in all markets for the second consecutive quarter.

CME’s interest rates segment was its best performing in the three months to the end of September, with average daily volume up 36% to 14.9 million lots a day. This was driven partly by CME’s three month Secured Overnight Financing Rate (SOFR) future, which traded 91 million lots last month, according to FOW Data, making that contract CME’s most traded derivative.

And Duffy was keen to stress this performance was realised without cutting fees or paying incentives, which is part of the FMX playbook.

FMX Futures, which launched on September with a three month SOFR future, is working with LCH, the clearing house owned by the LSE Group which also clears US interest rate swaps. The idea is FMX clients that have dollar swaps with LCH can benefit from cross-margining between the swaps and the futures traded on FMX, making the futures cheaper.

But CME also has cross-margining, between its cleared dollar swaps and futures and options which deliver material savings.

Suzanne Sprague, senior managing director & global head of clearing and post-trade services, told the call: “In terms of our portfolio margining programme where we offer offsets between interest rate futures and options and interest rate swaps, we continue delivering average daily savings of about $7bn (£5.4bn) to clearing members. Most of that is from US dollar swap activity.”

CME and DTCC, which runs US Treasury clearing house the Fixed Income Clearing Corporation (FICC), launched in January a service enabling capital efficiencies for clearing members that trade and clear both US Treasury securities and CME Group interest rate futures.

Sprague added: “In the cross-margining programme with FICC we continue increasing the number of participants. We currently have 12 member participating in that programme and have achieved upwards of $1bn of average daily savings.” She said CME is keen to increase participation in both programmes.

Duffy went on to discuss the importance of liquidity for traders: “The cheapest cost to any participant is the transaction fee whereas the bid-offer is extremely expensive when it gets wider. If you look at some of our competitors, their spreads are a lot wider than CME’s so the cost will be dramatically higher than any incentive programme or transaction fee they could pay.”

FMX plans to challenge CME by a combination of cheaper trading fees and the margin savings created by the cross-margining partnership with LCH, backed up by incentive schemes for liquidity providers. Some ten banks and market-makers have also invested in the platform.

Mike Dennis, CME’s global head of fixed income, said: “It’s still early days but we see our bid-ask spreads are a quarter tick tighter in front month SOFR contracts and almost a half tick tighter as you move out the SOFR curve. As we know, a half tick equates to $12.50 per contract in SOFR futures which dwarfs the size of the transaction fee.”

Duffy also outlined his concerns about US Treasury futures clearing at LCH, which is regulated by the Bank of England.

The CME chief executive and chairman told the call: “I have said it pretty loud and clear how I feel about this. I keep getting rebuttals that money for US participants is held in US banks which is irrelevant. We are talking about the resolution authority and the authority over who gets to make the decisions over a default and that would be the Bank of England and the FCA not the United States of America."

Duffy concluded: “That has been our argument and people keep dodging it. I know they [LCH] are a duly regulated clearing entity but that’s got nothing to do with our argument. I will continue to be loud about this and make sure people understand what could be the detrimental effect of having US treasuries not only cleared overseas but … having the resolution authority being overseen by a foreign regulator and not the United States government.”