BGC Group Launches New SOFR Futures Exchange, Challenging CME's Dominance

In a bold move to disrupt the financial services industry, BGC Group Inc., led by Cantor Fitzgerald CEO Howard Lutnick, has announced the launch of a new exchange that will start trading secured overnight financing rate (SOFR) futures on September 23rd. This strategic move aims to challenge the Chicago Mercantile Exchange's (CME) long-standing monopoly in the SOFR futures market, which currently accounts for 30% to 40% of the exchange's interest rate derivative volumes.

Shaking Up the Interest Rate Derivatives Landscape

Introducing the FMX Futures Exchange

The FMX Futures Exchange, a consortium backed by a powerhouse of financial services companies, including Bank of America, Barclays, Citadel Securities, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Jump Trading Group, and Tower Research, is poised to disrupt the status quo. These industry giants have collectively invested $172 million for a 26% stake in the exchange, valuing it at $667 million. Additionally, BGC has granted the partners an extra 10% stake contingent upon them meeting specific volume targets.

Challenging the CME's Monopoly

The FMX Futures Exchange's primary objective is to capture a portion of the CME's dominant position in the SOFR futures market. Lutnick, the CEO of BGC Group, has expressed his enthusiasm for the venture, stating, "We're going to create a break in the monopoly built by the Chicago Mercantile Exchange. It's so fun and it's so exciting."

Regulatory Approvals and Clearing Arrangements

Despite concerns raised by CME CEO Terry Duffy about the regulatory hurdles that FMX may face, the new exchange has obtained all the necessary approvals and registrations from the Commodity Futures Trading Commission (CFTC) to launch on September 23rd. The exchange will be clearing trades through a U.S. subsidiary, using the services of the London-based clearing house, LCH Group.

Anticipated Market Impact and Growth Projections

Piper Sandler analyst Patrick Moley believes that FMX is unlikely to capture a "meaningful" market share from the CME in interest rate futures until the third year after its launch. However, Lutnick remains optimistic, stating that he expects the new exchange to have a record-breaking open interest by the end of its first year of operation.

Expanding the Product Offering

In addition to SOFR futures, the FMX Futures Exchange plans to start trading U.S. Treasury futures in the first quarter of next year. This diversification of the product portfolio aims to further challenge the CME's dominance in the interest rate derivatives market.

Regulatory Challenges and Potential Roadblocks

While Lutnick remains confident in the FMX Futures Exchange's ability to succeed, CME CEO Terry Duffy has expressed concerns about the regulatory hurdles the new exchange may face. Duffy believes that U.S. regulations may ultimately prevent FMX from thriving, given its reliance on the London-based clearing house, LCH Group.However, Lutnick and the FMX team remain undeterred, asserting that as a CFTC-recognized organization, the exchange will be clearing trades through a U.S. subsidiary, ensuring compliance with domestic regulations. The battle for market share in the interest rate derivatives space is set to intensify, with the FMX Futures Exchange poised to disrupt the status quo and challenge the CME's long-standing monopoly.