according to"WSJ, the leading futures exchange, CME, filed in August to register futures commission merchants (FCMs). If the application is approved, CME will become the FCM of its own exchange, and future investors can bypass the current FCM and directly connect to CME for futures trading.
Indeed, if regulatory approval is obtained, compared with other FCMs, CME will have lower operating costs and obtain a more competitive operating model, such as reducing transaction costs for investors. However, this approach is bound to cause protests from other FCMs.
FCMs are primarily responsible for clearing futures contract trades, big business on Wall Street. Investors who want to buy and sell futures must provide margin (cash) in FCM. If the price direction is not what investors expect, FCM will require investors to deposit more margin. Once the market price fluctuates greatly, the default of a large trader may cause losses to FCM.
Joseph Guinan, CEO of Advantage Futures, which has a large FCM business, believes that CME will not directly compete with FCM.
"I don't think CME will really compete directly with FCM, but if they do, it will be a complete game changer for the FCM industry."
In response, a spokesperson for the CME said:
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Finance professor: CMEs forced to adopt FCM model
FTX submitted a proposal to the US CFTC (Commodity Futures Trading Commission) in March this year, hoping to use 100% margin algorithmic liquidation to replace traditional FCM. This proposal was praised by CFTC Chairman Rostin Behnam, but it also caused doubts from Wall Street giants, including the implementation of CME Director Terry Duffy and Executive Director Sean Downey.
At the congressional hearing, CME CEO Terry Duffy believed that FTX's proposal would increase market risk, while Sean Downey said at the CFTC meeting that the existing industrial structure can cope with market fluctuations, while algorithms cannot cope with "unexpected conditions."
These claims were also refuted by FTX founder SBF, saying that 24-hour instant liquidation can provide higher risk management and control capabilities.
Craig Pirrong, a professor of finance at the University of Houston, believes that CME's move is a response to the FTX proposal. By establishing its own FCM, it can save transaction costs for investors and build a moat.
“From a philosophical point of view, CME would not want to be an FCM, but in case the CFTC approves the FTX proposal, then from a competitive point of view, CMC may consider operating its own FCM as a last resort.”
As Terry Duffy said at the hearing, once the CFTC approves, based on competitive pressure, CME will be forced to adopt the FTX model.
The CFTC is currently weighing whether to approve FTX's proposal and may make a decision in the next few months.
FTX seems to be actively preparing now. In addition to completing the LedgeX license and obtaining three major CFTC licenses, FTX US Derivatives hired former CFTC Commissioner Jill Sommers to the board of directors last month. In addition, the current board chairman Larry E. Thompson was also in the Depository Trust Corporation DTCC serves as Vice-Chairman.
In addition to FTX, Coinbase is also warming up and is now applying for an FCM license
