Can a new US futures exchange upend the market?

Key Takeaways

• Lutnick’s FMX Futures aims to challenge CME’s dominance
• Its partnership with LCH is seen as a main differentiator
• Previous challengers to CME have faced stiff competition

FMX Futures Exchange, a new platform from BGC Group, hopes to make inroads into CME Group’s dominant position in the industry. Backed by several heavyweight financial institutions, the venue will initially offer US Treasury and spot currencies followed by Secured Overnight Financing Rate (SOFR) and Treasury futures.

The platform, which got the go-ahead from the Commodity Futures Trading Commission in January, is scheduled to go operational in September. The aim is to provide a one-stop shop for traders, and the firm hopes to attract early adopters with low or no fees in the first year.

BGC is the broker business of Cantor Fitzgerald, and FMX will combine its Fenics US cash Treasury and spot foreign exchange platforms and US interest rate futures exchange. FMX said it is partnering with investment banks, market makers and futures commissions merchants to compete with CME’s US interest rates complex and reckons its stand-alone, state-of-the-art futures exchange will provide the necessary resiliency to a market historically served by a single venue.

However, as previous attempts have shown, taking a large slice of the market from the incumbent in the USD 4.2 trillion a day market is far from a done deal.

Benefits for HF traders

The exchange, by being located in New York rather than Chicago, can leverage the firm’s low latency trading infrastructure and global distribution to further support liquidity in the interest rate futures market. New York high-frequency traders will be physically closer to the exchange and gain milliseconds of advantage and efficiencies.

Moreover, by disrupting the futures market and potentially taking away market share from the incumbents, the arrival of the new platform could benefit users by leading to lower fees as the parties compete.

In a February full-year 2023 results call, BGC’s chairman and chief executive, Howard Lutnick, highlighted several drivers behind the creation of FMX Exchange, from the need for greater competition and market efficiency to more integration with financial technology and the reduction of systemic risk.

Gaining critical momentum?

Bank of America, Barclays, Citadel Securities, Citigroup, Goldman Sachs, JPMorgan, Jump Trading Group, Morgan Stanley, Tower Research Capital, and Wells Fargo have taken minority ownership stakes in the exchange, which is valued at roughly USD 667m.

Such hefty backers must give confidence to the FMX camp. Unseating CME this time will not be easy, as the exchange alone has around 98% of on-exchange interest rate derivatives in North America, according to data from the Futures Industry Association.

Moreover, after a slow start, CME has had success with SOFR, which replaced its popular Eurodollar futures and options that referenced LIBOR. Last year, SOFR futures and options saw average daily volume soar 92% to 5.3 m contracts, with record open interest of 60,891,125 contracts.

BGC, though, is hoping its partnership with LCH, the London Stock Exchange Group’s clearinghouse, will help break the stranglehold. Figures from ION show LCH has a lock on over 97% of US dollar OTC swaps, which is seen as a key factor because it enables industry players to post collateral in two separate places.

The incumbent’s cards

LCH, as one of the largest clearers, can offer efficient margining like CME’s, according to FMX. Nevertheless, as moving to a new exchange and clearing house is no small task and is operationally complex from a trading perspective, market participants would require substantial incentives to switch platforms.

CME has the advantage of a more liquid marketplace, which will continue to attract large trade orders, thereby potentially making it more difficult for any entrants to gain substantial market share. The world’s largest exchange is confident. ‘Competition is something that has made CME what it is today,’ CEO Terry Duffy said in October.

Moreover, while FMX has teamed up with LCH, CME and The Depository Trust & Clearing Corporation (DTCC) in January went live with their enhanced cross-margining arrangement, ‘enabling capital efficiencies for clearing members that trade and clear both US Treasury securities and CME Group Interest Rate futures.’ That’s in addition to its 10-year partnership with Google, signed in 2021 to ‘transform derivatives markets through technology, expanding access and creating efficiencies for all market participants.’

Given CME’s deep pockets and other businesses—the USD 80 billion market cap group generates approximately 38% of its total revenues from its US interest rate and foreign exchange businesses—it also has the financial flexibility to lower fees, albeit temporarily, to retain customers.

Regulators have been trying to reduce risk in capital markets since the financial crash. The addition of new exchanges and clearing houses in the market holds the opportunity to mitigate concentration risk, but how easy this will be for these new entrants is one to observe.