CME Turns to Yellen in Battle for Dominance of US Treasuries

(Bloomberg) - CME Group Inc. is amping up the battle for market share in US Treasury futures, pulling all stops to thwart Howard Lutnick's plan to launch rival contracts that clear in London.

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Chief Executive Officer Terry Duffy, who has repeatedly raised concerns about Lutnick's plan for clearing, said he has taken the issue to Treasury Secretary Janet Yellen. The 66-year-old also spoke with Securities and Exchange Commission Chairman Gary Gensler and Rostin Behnam, chairman of the Commodity Futures Trading Commission.

The crux of the matter hinges on whether the US should allow Treasury futures to be cleared abroad, something that Duffy says doesn't happen anywhere else in the world. Lutnick, the longtime CEO of Cantor Fitzgerald LP, has partnered with UK-based clearinghouse LCH Group to clear Treasury futures on his FMX exchange.

"I think it's going to be difficult for him to move that over to London," Duffy said in an interview at CME's headquarters in Chicago this week. "I told everybody that I've talked to, from the Treasury secretary down, 'if you think it's OK, I'll accept your response, but you have to at least explain to me why it's OK.'"

The dispute with Lutnick, one of Donald Trump's closest allies on Wall Street, has recently turned political. In August, Democratic Senator Dick Durbin of Illinois — CME's home state — warned of risks that clearing abroad could have on the stability of the US sovereign-debt markets, according to a letter to the CFTC, the top US derivatives regulator.

"The FMX Futures Exchange is fully approved by the CFTC to list SOFR and US Treasury futures contracts," a spokesperson for BGC Group, the parent of FMX, said in an emailed statement. CME's efforts to "maintain its monopoly rest on a demonstrably false premise," the spokesperson said, adding that LCH has been registered with the Commodity Futures Trading Commission since 2001.

The $27 trillion US Treasuries market is considered one of the world's safest investments, with CME being a dominant player in both cash and futures. CME, which is also facing competition from FMX in the SOFR market, handled more than 99% of the trading volume in interest-rate futures on US exchanges in 2023, according to data from the Futures Industry Association.

Lutnick now wants to challenge CME's dominance, having lined up major US banks including Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. to back his plan.

"What they say is that LCH is a duly regulated exchange — that's absolutely correct," Duffy said. "What they don't say, which is the bigger issue, is that the Bank of England still has oversight of a default."

LCH reiterated in a statement that their clearinghouse is directly registered with the CFTC to clear futures contracts, and will hold all futures customer collateral in the US. The CFTC and the Bank of England are also under a memorandum of understanding requiring that the regulatory bodies cooperate and exchange information to supervise and oversee clearing organizations that operate cross-boarder in the US and UK.

Duffy cited the meltdown of the nickel market in London as a recent example when American companies got hurt by actions of an exchange based elsewhere in the world. When prices for the metal spiked 250% in two days in early 2022, the exchange intervened to close the market and cancel several hours of trades at the highest prices.

At the time, regulators publicly admitted that they were in the dark, with the summary of a meeting of the Bank of England's Financial Policy Committee showing that "the assessment of risks was made more difficult by the relative opacity of commodity derivatives markets."

"When we saw what happened with LME, that was very disturbing," Duffy said. "I had a lot of clients that suffered from that."

There are signs the issue is starting to catch the attention of regulators. At a Treasury markets conference last month, CFTC's Behnam said he was taking the concerns raised by Senator Durbin "very seriously," and he was working with the Treasury Department on a response.

"We are working on the set of questions he asked, thinking through the issues Senator Durbin raised and making sure we are going to have a thorough analysis between us and the Treasury Department, given obviously the connection with Treasury cash, and come up with conclusions and possibly recommendations," he said at the event.

Trump Relationship

Duffy said he isn't concerned about Lutnick's close relationship with Trump, even if the former president and Republican nominee wins the November election. In a separate interview with Bloomberg Television, Lutnick said cabinet members and appointees should be loyal to Trump.

"The last thing the president of the United States needs is more conflicts," Duffy said. "You cannot be bringing in people that you are supposedly close to through an election to put them in positions to help them competitively in business. That would be a biblical disaster."

Still, Duffy is fighting back even before Lutnick files his application to list US Treasury futures on FMX.

"The laws of the United States need to prevail over its own sovereign debt," Duffy said. "I'm not giving up on these issues. I work hard."

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