MW Cantor Fitzgerald's Howard Lutnick breaks into interest-rate futures market to challenge behemoth CME
The new FMX Futures Exchange, backed by Lutnick's BGC Group and 10 investment banks, launches Monday night.
Howard Lutnick, the head of investment bank Cantor Fitzgerald and financial-technology company BGC Group $(BGC)$, is breaking into the interest-rate futures market by launching a new exchange on Monday that's set to rival CME Group $(CME)$.The new FMX Futures Exchange, backed by BGC and 10 investment banks, is set to launch at 9 p.m. Eastern time on Monday. The exchange will begin trading in futures on the Secured Overnight Financing Rate, a benchmark rate also known as SOFR, and plans to add Treasury futures in the first quarter of 2025.More than $4 trillion worth of interest-rate futures were traded per day during the fiscal 2023 year, making them the world's largest and most widely traded contracts, according to BGC. These contracts come in various forms that include Treasury, SOFR, and eurodollar futures. They are used by banks, investors, and businesses to hedge against interest-rate risk.Treasury futures are contracts for the purchase and sale of U.S. government notes or bonds for future delivery, and they trade on an average of more than $600 billion a day. Asset managers and leveraged funds use them to express directional views on the yield curve and duration, or the sensitivity of a bond to interest-rate changes. Mutual funds with volatile investor flows may prefer having greater exposures to Treasury futures since adjusting those exposures is not costly and is relatively easy to do. SOFR is the successor to the scandal-plagued London interbank offered rate, and reflects the cost of borrowing cash overnight that's collateralized by Treasury securities. Because it's essentially an overnight rate for risk-free borrowing, SOFR is closely linked to the direction of the fed-funds rate. SOFR futures can provide insights into the market's thinking about possible interest-rate moves by the Federal Reserve in a way that's similar to fed-funds futures."The reason why people rely on implied fed-funds futures pricing is because we don't have any other publicly transparent options," said Edward von der Schmidt, founder of Los Angeles-based Datum Research, a provider of market insights. "Having additional SOFR-related products come to an exchange would give us insights into financing conditions we otherwise wouldn't have, which can have an appreciable impact on short-term rates and knock-on effects to other asset classes." Meanwhile, Treasury-futures activity provides insights into how portfolio managers and other investors might be positioning for future moves from the Federal Reserve, he said. However, "just because major banks are backing this type of an initiative doesn't mean that it won't face headwinds," von der Schmidt, a former Morgan Stanley strategist, said via phone. "There's a reason why CME's incumbency is so strong - including the ability of traders to hedge risks and offset margin requirements across a wide number of CME products - and the entire world trades on its interest-rate futures."FMX Futures received approval from the Commodity Futures Trading Commission in January and is being touted as the only real challenger to Chicago-based CME (CME), which derived about half of all its average daily volume from its interest-rate business during the second quarter.During a Bloomberg Television interview in April, Lutnick cited CME's 99% share of overall trading volume in interest-rate futures as of last year, and said major banks want "an alternative and they want a competitor." Separately, Lutnick has also told investors that the U.S. needs a second major interest-rate exchange to reduce transaction costs and systemic risk, and support financial stability, among other things. The 10 other firms backing the FMX Futures Exchange - besides New York-based BGC Group - are: Bank of America $(BAC.SI)$, Barclays (UK:BARC), Citadel Securities, Citi (C), Goldman Sachs $(GS)$, JPMorgan $(JPM)$, Jump Trading Group, Morgan Stanley $(MS)$, Tower Research Capital, and Wells Fargo $(WFC)$.CME Group CEO Terry Duffy and Lutnick have exchanged words in recent months in the run-up to the launch of the FMX Futures Exchange. Duffy, appearing in a CNBC interview a few months ago, pushed back against the claim that CME is a monopoly and against Lutnick's use of figures showing rapid growth in FMX's cash Treasury platform. Duffy also pointed to difficulties the new futures exchange may face by relying on a London-based clearinghouse, known as LCH. "I'm not so sure that Mr. Lutnick's offering is going anywhere at all," Duffy told CNBC. "I'm not going to sit idly by while he talks about these numbers, and how his percentages are growing, and we are this great monopoly that he's going to come after and disrupt. It's false...I don't have a monopoly." Lutnick responded on X, the social-media platform formerly known as Twitter, with this post: "I have the utmost respect for the CME and Terry Duffy. I think it's time they show BGC the respect we clearly deserve. FMX and BGC Group are here to stay."
-Vivien Lou Chen
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(END) Dow Jones Newswires
September 23, 2024 12:08 ET (16:08 GMT)
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