Clash between FTX and CME over crypto derivatives

The world’s largest derivatives exchange, the Chicago-based CME Group, has officially applied to become a Futures Commission Merchant (FCM).

The The Wall Street Journal reports this, noting that with this move CME would eliminate brokers in the futures market.

Something similar, in some ways, was also requested last May by the famous FTX crypto exchange, when it submitted an application to the CFTC to become a derivatives clearing organization.

In both cases, if the applications from CME and FTX are approved, the two companies can issue and sell derivatives directly, without going through third parties.

FTX and CME share a common goal

The strange thing is in Maywhen FTX submitted its application, CME Group President and CEO Terry Duffy had strongly criticized this initiative.

He explicitly said not only that FTX’s proposal was flawed, but more importantly that it failed “significant risk to market stability and market participants.”

Indeed, according to Duffy, FTX would thereby remove standard credit controls and destroy incentives for risk management by limiting capital requirements and mutual risk.

He added:

“FTX’s proposals are nothing more than cost-cutting measures that will come at the expense of best practices for risk management, market integrity, customer safety and ultimately financial stability.”

However, it now appears that CME Group is looking to do the same, which is to eliminate intermediaries to reduce costs and offer cheaper, but perhaps less secure, derivatives to the market.

In accordance Alexander Osipovichauthor of the Wall Street Journal article, CME’s move would literally take its cue from rival FTX.

The crypto derivatives market is definitely booming now, and CME is by far the most active traditional financial company in the sector.

However, the new, or relatively new, crypto exchanges are able to gather a larger audience of traders who are particularly interested in cryptocurrencies and their derivatives, so they are certainly able to compete with the Chicago giant in this specific area.

For example, according to Coinglass data, right now in the ranking of platforms with the highest open interest in Bitcoin futures, CME would only be in fifth place, followed by FTX itself.

Therefore, for all intents and purposes, they are direct competitors, as far as the crypto derivatives market is concerned, with CME coming from traditional finance, while FTX is from the crypto world.

CME and FTX want to revolutionize the market for crypto derivatives

With the above proposals, both players want to gain an advantage over others by lowering costs, but with the risk that the derivative products they make and bring to market become less secure.

According to Duffy’s May statements, FTX wants to implement a light risk management clearing regime, which could significantly increase risk, potentially removing up to 170 billion dollars in capital which can absorb any losses.

On the other hand, according to others in the industry, CME’s move could initiate a major upheaval for the FCM industry, generating dramatic concerns for all FCMs currently in existence.

In fact, the risk is that specialized FCM operators will be wiped out by the giants that directly operate exchange platforms.

The speculation circulating is that CME does not actually want to initiate this turnaround, but is somehow trying to influence the CFTC’s decision on the FTX application.

The CFTC has not yet made a decision on either proposal, and in light of the situation that could arise if it accepts CME’s proposal, it is believed that it may also decide to reject both. On the other hand, should it accept that FTX seems to be difficult for it to reject CME.

This is therefore a direct confrontation as in theory may also cause damage to the entire crypto derivatives sectorand not only, but actually constitutes a kind of attempt to revolutionize, or at least develop, a sector where few major innovations have been seen in recent years.

The entry of crypto traders into the derivatives market, on the other hand, changes several things, first of all the easy access for small retail speculators to this market that was once dedicated specifically to professional traders.

The fact that CME ranks only fifth in open interest in Bitcoin derivatives speaks volumes for how important crypto exchanges have now become in this specific sector.

It is also worth noting that the leading operator, Binance, has had more problems previously precisely because of its derivatives offering to private customers.

The clash between traditional and crypto-based finance

As far as crypto exchanges go, this is still a very young industry, so much so that Binance is only five years old. On the other hand, in terms of traditional exchanges, for example, the CME (Chicago Mercantile Exchange) started as far back as 1898 as a nonprofit exchange for agricultural commodities, and became the leader of the global derivatives market about sixteen years ago.

This is not just two completely different generations colliding, but probably also two different views on the financial markets.

On the one hand it is the classic and professional, while on the other it is innovative and open to all. And while financial derivatives can also be dangerous for those who do not handle them well, the crypto markets are now opening the doors of finance to virtually everyone, including those who want to use advanced instruments that exist only in the form of derivatives.

The CFTC (Commodity Futures Trading Commission) has so far shown some openness to crypto innovations, but it is worth remembering that it is a US government agency that is likely trying to protect the country’s financial infrastructure. CME is now very much among them, while FTX is the outsider trying to loosen a long-established framework.

Considering that there is still doubt among institutions whether it can be considered excessively risky to open derivatives markets to all retail speculators, the CFTC may well side with the CME this time, despite the fact that in recent years it has been very open to crypto markets.

Its decision in this regard could also be a milestone for the derivatives market if it decides to approve both requests.