CME Group Inc. criticized crypto exchange FTX’s plan to cut out the middlemen in futures markets. Now the Chicago stock market giant is taking a step in the same direction.
In August, CME CME,
filed paperwork to register a futures commission merchant, or FCM — essentially a brokerage that would allow investors to buy and sell futures on the CME’s marketplace. If the application is approved and CME enters the brokerage business, investors can bypass existing brokers and connect to the exchange operator directly for futures trades.
The move could save money for investors, who pay fees to trade futures. But that is likely to lead to 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 units are a key part of their prime-brokerage arms — as well as for specialist firms such as Advantage Futures and RJ O’Brien & Associates LLC.
FCM plays a key role in the futures industry. Futures are contracts that allow traders to bet on whether markets such as oil, wheat or the S&P 500 will go up or down. Traders who want to buy or sell futures must post cash collateral, called margin, at an FCM. The FCM deposits more money into the trader’s account if his or her bet pays off, or demands more margin from the trader in case of a losing bet. A default by a large trader could potentially cause a loss to 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 proposed that traders be allowed to add margin directly to its US bitcoin futures exchange, without using an FCM. The plan sparked intense debate, with financial heavyweights lobbying both for and against it in Washington. At a congressional hearing in May, CME chief Terrence Duffy said the FTX plan “will significantly increase market risk,” while Mr. Bankman-Fried defended the proposal as a long-overdue update to the plumbing behind the futures markets.
The Commodity Futures Trading Commission is considering whether to approve FTX’s plan and may reach a decision in the coming months.
Other crypto exchanges have also tried to cut out middlemen as they have launched bitcoin derivatives platforms. Coinbase Global Inc. COIN,
bought a derivatives exchange in January and is in the process of applying for an FCM licence. 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 attracted little attention. The CME spokeswoman confirmed to The Wall Street Journal this week that CME had submitted the application.
An extended version of this story appears at WSJ.com.
