If approved by the CFTC, CME may be forced to adopt an FTX-style model
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If approved by the CFTC, CME may be forced to adopt an FTX-style model
CME criticized FTX's proposal to remove futures brokers in May, but CME submitted documents in August to register as a broker-dealer. Experts believe CME is now compelled to adopt the same direction as FTX.
Navigating Web3 tides with focused insightsCME criticized FTX's proposal to remove futures commission merchants (FCMs) in May, but now in August, CME has filed documents to register as a broker-dealer. Experts believe CME is being forced to adopt the same solution direction as FTX.
According to The Wall Street Journal, CME, the leading futures exchange, submitted registration documents for Futures Commission Merchants (FCMs) in August. If approved, CME would be able to become its own exchange’s FCM, allowing investors in the future to bypass current FCMs and connect directly with CME for futures trading.
Indeed, if regulatory approval is granted, CME would have lower operating costs compared to other FCMs, giving it a more competitive operational model—such as reducing investors’ trading fees. However, this approach is certain to draw protests from other FCMs.
FCMs are primarily responsible for clearing futures contract trades—an important business on Wall Street. Investors who want to buy or sell futures must post margin (cash) with an FCM; if prices move against their positions, the FCM will require them to deposit additional margin. When market volatility is high, defaults by large traders could lead to losses for FCMs.
Joseph Guinan, CEO of Advantage Futures, which has substantial FCM operations, believes CME won’t directly compete with FCMs.
“I don't think CME will truly compete head-on with FCMs, but if they do, it would completely change the game for the entire FCM industry.”
In response, a CME spokesperson said:
“We strongly believe in the FCM model, which provides risk management for all participants in the industry.”
Finance Professor: CME Forced to Adopt FCM Model
In March this year, FTX submitted a proposal to the U.S. Commodity Futures Trading Commission (CFTC), hoping to replace traditional FCMs with an algorithmic clearing system using 100% margin. The proposal was praised by CFTC Chair Rostin Behnam, but also met skepticism from Wall Street giants, including CME CEO Terry Duffy and Executive Director Sean Downey.
At congressional hearings, CME CEO Terry Duffy argued that FTX's proposal would increase market risks, while Sean Downey stated at a CFTC meeting that the existing structure can handle market volatility, whereas algorithms cannot cope with "unexpected situations."
These claims were rebutted by FTX founder SBF, who said 24-hour real-time clearing offers stronger risk control capabilities.
Craig Pirrong, finance professor at the University of Houston, believes CME’s move is a response to FTX’s proposal—by establishing its own FCM, CME could save investors trading costs and build a moat.
“Philosophically, CME wouldn’t want to be its own FCM, but if the CFTC approves FTX’s proposal, then from a competitive standpoint, CME might see running its own FCM as a necessary choice.”
As Terry Duffy stated during the hearing, once the CFTC approves it, due to 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 coming months.
FTX appears to be actively preparing as well. Currently, besides completing LedgerX licensing and obtaining three key licenses from the CFTC, last month FTX US Derivatives appointed former CFTC commissioner Jill Sommers to its board, and current board chair Larry E. Thompson previously served as vice chairman at the Depository Trust & Clearing Corporation (DTCC).
Besides FTX, Coinbase is also gearing up and is now applying for an FCM license.
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