CME Group Inc. has criticized crypto exchange FTX’s plan to cut out middlemen in the futures markets. Now the Chicago stock exchange giant is taking a step in the same direction.
In August, CME CME, -0.86% filed documentation to register a futures commission dealer, or FCM — essentially a brokerage firm that would allow investors to buy and sell futures on CME’s marketplace. If the application is approved and CME enters the brokerage business, investors could bypass existing brokers and connect directly to the exchange operator for futures trading.
The move could save money for investors who pay fees to trade futures. But it will likely draw complaints from other FCMs who could lose revenue if CME undercuts them on fees. Clearing futures trades is big business for Wall Street banks — where FCM entities are an important part of their prime brokerage division — as well as specialist firms like Advantage Futures and RJ O’Brien & Associates LLC.
FCMs play a key role in the futures industry. Futures are contracts that allow traders to bet on whether markets like oil, wheat or the S&P 500 will rise or fall. Traders wishing to buy or sell futures are required to deposit cash collateral, known as margin, with an FCM. The FCM deposits more money into the dealer’s account if their bet pays off, or asks the dealer for more margin in the event of a losing bet. A failure of a major trader can potentially result in losses for an FCM.
CME’s move comes after the company attacked a similar plan by FTX, the fast-growing crypto exchange led by 30-year-old billionaire Sam Bankman-Fried.
Earlier this year, FTX suggested that traders should be allowed to deposit margin directly to their US bitcoin futures exchange without using an FCM. The plan sparked intense debate, with financial heavyweights in Washington campaigning both for and against. At a congressional hearing in May, CME chief executive Terrence Duffy said the FTX plan “would significantly increase market risk,” while Mr. Bankman-Fried defended the proposal as a long-overdue update to the plumbing behind futures markets.
The Commodity Futures Trading Commission is weighing whether to approve FTX’s plan and could make a decision in the coming months.
Other crypto exchanges have also tried to cut out intermediaries as they launched bitcoin derivatives platforms. Coinbase Global Inc. COIN, +4.12%, acquired a derivatives exchange in January and is in the process of applying for an FCM license. Bitnomial Inc., a small bitcoin derivatives exchange, received an FCM license in September.
CME made no public announcement when it applied to register the new entity, and the application drew little attention. The CME spokeswoman confirmed to The Wall Street Journal this week that CME made the request.
An expanded version of this story appears on WSJ.com.
Comments are closed.