All right, everyone, welcome back to the 2024 Piper Sandler Global Exchange and Trading Conference. My name is Patrick Mulvey. I cover the exchanges, online brokers, and trading companies here at Piper Sandler. Our next guest, kicking us off this afternoon, is CEO of CME Group, Terry Duffy. Terry, thank you so much for joining us.
Thank you, Patrick. Appreciate it.
All right, so I'll kick it off with a question on the environment. Relatively strong start to the year for volumes against a pretty tough comp. Open interest is up 15% year to date. We're seeing rate uncertainty continue. We have a presidential election coming up. How are you thinking about this setup into the back half of the year and what it means for your.
Hold that question for one second Sure. because before I start, I just wanna say congratulations to a few people. One is Douglas Cifus and Vincent Viola for bringing their team to the Stanley Cup finals. Somebody from our industry, having a team in the Stanley Cup is absolutely awesome. And Virtu is a big client of CME, but more importantly, Dougie and Vinnie are dear, dear friends of myself and my family, so congratulations. I also wanna thank the chairman of the CFTC for some really strong comments he made at lunch. I thought it was an excellent interview you did with him, Patrick.
And when the side comments came along, is he going to go take over the SEC, so we can have that throughout the whole world? I think, Rostin, I think your comments are very well-received, and your leadership is much appreciated by our industry. I'm a huge fan of regulation. I think it's what breeds credibility to the marketplace, so thank you for all your efforts and your teams. Now I'll ask you. answer your question. It was around politics?
Just around the environment and what you're thinking into the second half.
The marketplace?
I think it's gonna be pretty fascinating. You know, there, there's so many people looking from six rate cuts a year ago to four rate cuts six months ago, to three rate cuts five months ago, to I knew we weren't gonna have but 1 rate cut this year all along. You know, so the prognosticators, I should say, have really missed this one badly about what the Fed's gonna do, and I think the Fed's really telegraphed what it wants to do all along. So it had a target out there, and it said until it meets that target, it's not doing anything, and it hasn't. So what does that mean? I think there's a lot of people still upside down a little bit in the markets.
I think there's been some shorts that are getting a little beat up in the equity market 'cause they didn't see a rally coming with this type of environment that we're in, and there's other people on the other side of the market that are either missing the bond trade. So I think it's kind of gone back and forth, so I think it's gonna be very active going into the latter half of this year because the election's gonna play a lot to do with it. We have 60 major elections around the world that have an impact, not only in their countries, but could have an impact on ours because we're a global business, and those people have to participate in U.S. marketplaces, so we'll see where that shakes out.
As far as our administration goes, I think it's anybody's ballgame. I mean, it's gonna be a very close election in light of the recent trials and tribulations, no pun intended, of former President Trump. So it'll be interesting to see what happens in Chicago, if, in fact, President Biden is the nominee. There's still some speculation that he won't be the nominee. So I think that puts a lot of things into flux as far as what that means for business, what that means for regulations, and how do people manage that risk going forward. So I think it'll be very exciting in the marketplace next several months.
That would extend to the energy markets as well?
Well, energy, for a lack of a better term, has been stuck on stupid. So you look at the energy market, it's been in a $10 range for a year and a half almost, and when you look at what's going on around the world, it's really hard to suggest that would be the case. You would think when tanks lined up on the border of Ukraine, that people would have thought maybe they're gonna come in, and they did, and then oil moved. Historically, the market would have moved when they saw the first tank. It's no different than when World War II started, and the first reporter wrote a story about it 'cause they saw a tank coming, and that's how the first story came out about World War II.
So I think that oil being in this range is very surprising, Patrick, to be honest with you. I think that oil above $100 trades a lot more and below $50 trades a lot more. But in this range, it's doing nothing, and with the geopolitical events right now, we're just not moving the needle. And I think the United States has big capacity, and people know that. I think people are betting on that if, in fact, President, former President Trump gets in, that the US will be more self-sufficient on oil and will have a lot more oil in the pipeline. And so I think that's the reason why we're sitting in this range today, 'cause the politics are very close on this.
Sure. I wanna ask about some of the competitive dynamics. in the industry. FMX is launching in September. There's a number of banks and market makers that have become strategic partners. This is something that's been tried in the past and failed a number of times, and CME's always, you know, prevailed in that case. What are your thoughts on FMX, and how do you feel about your ability to defend the interest rate complex that you have?
Very good. I feel very good about our defending our complex. We've been doing it for over 100+ years. Competition is good, but at the same time, I think our value proposition is something that's really hard to give up. When you look at what we've been able to accomplish by putting our portfolio of products of interest rates, we did 34.5 million treasury contracts last week. It was the busiest day in the history of our treasury complex. That goes to show you that people are mitigating and managing risk in CME's products. Why? Because there's about seven to $7.5 billion in savings for the biggest G-SIBs that use our bank, our products today in savings and margin every single day against their swaps portfolio at CME and their futures portfolio.
So I understand that the competition wants to list our product set, and others have always wanted to do so. But, you know, when you start citing numbers about what you're going to accomplish, when you don't have one contract open yet, I think is a bit of a stretch and misleading. So, you know, I think there's been some misinformation being said about the people who wanna compete with us about what we have and what they supposedly have. So I guess we'll let the customers make a choice for themselves. They raised $172 million, is my understanding. I don't know any of the details of that or what people get out of that.
I did see something in one of the handouts, that he was gonna buy back his own stock with that money, so I found that pretty fascinating, that people gave him $172 million to buy back his own company. Not a bad deal.
I'll just say, I don't think that they've said that they're. I think they've said they aren't gonna do that.
So Well, they had it in their brochure that they are. It was a public document, so I don't know.
I just don't wanna start any rumors. I don't know if that to be the case, and that wasn't what was told to me, but you.
Well, I can... I'm happy to show it to you.
Okay.
If anybody else wants, I'll give it to you all, too.
So if you talked there about some of the misinformation that's out there about what they're going to offer that you're not gonna offer. Can you speak to some of those? 'Cause I think it's important for investors.
Well, here, I think when, you know, you base your future success on what you're doing today is a bit of a stretch. And when you base what happened in London with the German bond, the Bund, and suggest that you can follow that same process to take market share from somebody else, but you have to talk about: how did the German Bund leave London? It was the banks in Germany that were government-sponsored, owned banks of Germany, who said, "This is a critically important market to our country, Germany.
It was a small market, and we didn't care that it was in London. Now, it's critical to the infrastructure of our country of Germany." So they brought it back. They deliberately collaborated together to bring that back. So let's talk about how that happened. You can't say that the German participants just moved that liquidity 'cause they had a better mousetrap. The participants were owned and sponsored by the government, moved that contract. So that's a bit of a misdirection there about how you're gonna have success.
As far as margin goes, you know, with the swaps, you know, basing success on what LCH has in swaps today, the infrastructure, after the Dodd-Frank rule passed, was already in place in London with LCH, with SwapClear and a few other things, assets they already own. So they're--they already had it there. So for us to get what we had by starting from scratch was a big move. So I, I think that basing it on that and saying that our margin was cheaper than the European margin, is just not is ignorant and not even understanding margin, because our margin on one-day gross is higher than two-day net, which is in Europe.
And it's a fact. Just all you have to do is do math, right? He likes to quote math. I already quoted math a lot today. So here's a little math thing for you. Do the math. The margin at CME was higher than Europe, not lower, and we still captured the transatlantic market, contrary to that. So there's a lot of misinformation of uneducated people saying things that I think is just blatantly wrong. So get your facts straight, do the math.
How big of a barrier and a moat do you think is the liquidity that you have on CME? And outside of liquidity, you know, you mentioned a couple of things. What do you think puts you in the best position to come out on top of this?
Our company puts us in the best position. We have, by far, in my estimation, and I've heard this from many of our participants. There's not a lot of market participants in the room. There's more of investor participants in here. Market participants demand a couple of things: they want efficiencies, and they want customer service. One of the greatest compliments we got, and it was from Ken Griffin, and Ken's a dear friend. I like Ken, even though he joined the consortium. Ken said, "There's one thing about CME: the train shows up every day on time," and that's critically important to what he does.
To me, that is what makes CME different. Our customer service is second to none. Our attention to detail is second to none. So I think that's a very strong value proposition from the clients. And when you look at some of the investments we have made over the years to put institutions together, like the Board of Trade, the New York Mercantile Exchange, COMEX, NEX, doing the deal with Google, is all savings to those participants that we give the customer service to. That's a really good value proposition for any organization to have.
And if you're gonna compete with that, and you're gonna base your theory on a handful of market share that you have in the cash side, that's a bit of That, that's your value proposition. So we'll see how it goes. And, you know, listen, I'm not taking anything for granted. We'll, we'll be very aggressive in what we need to do to protect our market, but we think we've already put those pieces of the puzzle in place today without doing anything, and those are efficiencies.
Switching gears, I wanna talk about growth opportunities and specifically, the U.S. credit markets. Last month, you launched corporate bond trading on BrokerTec. You're launching U.S. credit futures on June seventeenth. How do you think about the opportunity in U.S. credit for CME? Is that something that you view as a big growth driver going forward?
Well, I think it's been a pretty dark market, as we know. It's been a bank dealers market forever, and it's been efficient that way for whatever reasons. And some markets do better and more central limit order book participants. Some grow, some don't, and some are. There's a reason why there's block trades. There's a reason why they have what's called ex-pit trades. There's a whole reason why we have different codes or different trades, 'cause they are important to a constituency. Whether this is, I like to tell people I've seen a lot of people lose a lot of money being right, and I've seen a lot of people make a lot of money being wrong, and it's all about timing.
So we're looking at something right now that we don't just launch things because-... It's a market, and we wanna do it. We look at the timing, and where we're at in the cycle of the market system, market structure, a whole host of other things, and is the timing right? Well, you'll never nail it perfectly, but I think it's important that you get that out there. It's no different than Treasury clearing, and I don't know if you're gonna ask that question. but we look at it in the same light. It's all about timing. So we are listing these products today.
Well, now, I wouldn't say that our success rate's gonna be really big out of the gate here because, again, this market is mostly facilitated upstairs, and it's not really on the central limit order book. So we'll see how that plays out and how the participant wants to execute their trades. But they may like the central limit order book for this marketplace. We think they will ultimately, but maybe it's not the timing might be. You can't nail it perfectly. But we're trying.
On Treasury clearing, you recently applied for an application to clear, U.S. Treasuries. I know you've been asked about this, but can you talk about the medium to longer term opportunity there? Do you think CME has a right to win in this space?
I don't know whether anybody has a right to do anything, but I think when you look at the Treasury clearing, we didn't make the rules, the SEC did. So we have a really good relationship with DTCC and FICC, and we create a lot of offsets for our clients, so we've got a strong partnership with the incumbent right now in that space, and I think that incumbent will probably prevail ultimately. I think they will. They have the existing business today, and it'll be hard to move it out of there. But again, if I decide to file an application come 2026 when the rule goes into place, it'll probably be too late.
So I don't ever wanna forgo an opportunity. I've told Frank this at DTCC, I said, "I'm not trying to compete with you, but I don't know what the world's gonna look like in a year and a half or two, and I don't want to be sitting around waiting, thinking I should have filed that application when I could have," 'cause it takes time to go through this process. So we'll have the application in place. I assume we'll get it approved eventually. We hope to have it, the application, deemed complete by Q3, end of Q3, early Q4, and we'll see where it goes. Again, I don't know what the ultimate opportunity is here.
I do know there's an incumbent right now in DTCC and FICC that has all the business. But again, we'll see what it looks like in a couple years from now. So I won't make any predictions other than we'll be prepared either way. If, in fact, we go down this process and there is no there there for us in that, it's no harm, no foul, because we're not putting a ton into it. You know, anything we're tying up is reg- capital, which we still, you know, earn the income on that reg- capital that we have parked for other reasons for our business anyway, so it doesn't take anything out of our investors' pockets.
Just sticking with some of these growth opportunities, if we take a step back, you've obviously benefited from macro tailwinds across the board. You've seen a significant increase in volume over the last few years. As we look ahead, what are maybe the one or two things that you're most excited about and you think present the biggest growth opportunity, whether it's products, whether it's an asset class, whether it's a geography? What is that. What's that thing that's gonna drive the next leg of growth outside of the macro for CME?
For me, I think it's the equity markets, and I think we've had a lot of people focus on anywhere between 5 and 10 names in the equity markets, and I think that it will eventually get broader. Once it gets broader, that should increase our business dramatically on the futures side. So I'm really excited by the participation coming forward, new participants coming into the market, not buying the same crowded 7 stocks. I think they'll be looking for other opportunities, and in return, there's a, there's a hedging opportunity associated with that.
And so, that, that benefits us immensely, so I'm very excited about that asset class. And as far as that region goes, I think that when you look at the U.S. equity market, it's looked at around the world as the market that people want to participate in, so they can lay off risk in U.S. equity markets against their own needs of their country, because the correlations can be somewhat anywhere between 60%-90% correlated in equities. So you look at that, and even emerging markets will always look at the U.S. equity market.
So I'm very excited about that, and I'm excited for the growth coming both out of Asia and in. You know, China slowed down significantly on the retail side, but it doesn't mean the rest of Asia slowed down. We're still getting a significant amount of business coming out of there, both in our equity complex and our energy complex, and I think that will maintain that going into Europe and the U.S. as well. So I'm excited about that.
If we unpack that, you're, this is mostly institutions that are utilizing your product set to offset risk using U.S. equity markets. Is that what I'm hearing? It's not so much the retail aspect, but it's more geographic you know, outside of the U.S.
Yes. I think they're managing their own country's equity exposures in the U.S. equity markets, yes, institutionally. I'm not. I wasn't referring to retail.
Sure. And do you think that with your current product set right now, I'm assuming it's, you know, index options obviously is what you're referring to, index futures. Do you feel with your current product set that that's enough to kinda, like, satisfy demand from some of these players overseas, or is there other areas that you're looking at?
You know, I think that, again, I, I'm gonna go back to what I started this conversation with. I think efficiencies are, are what they're gonna demand, and I think you're gonna have to continually look to offer other products, even outside of your own comfort zone, to create those efficiencies, whether it's on the cash side or others, on the ETFs. I don't know what the ultimate answer is gonna be. I, I think I have an idea. So I think that's gonna be a push by the clients in order to drag those efficiencies out of the marketplace, because right now, there's inefficiencies in markets, where people see that they can may have savings.
So I, I think eventually they'll get pushed more and more together.
When you say, you say cash markets, I'm assuming the way to have exposure to that would be through M&A. Is that what you're saying or?
Well, it doesn't have to be through M&A, but that's a, that's possibly a way of doing it. We did M&A on the cash side when we did the deal with, with NEX, as you know, on the BrokerTec/EBS businesses. So that is a way to create the efficiencies against those assets, against our futures complex, which has been very successful for us. But, it doesn't mean that you have to do M&A, but you can.
Sure. Crypto? you know, we have two spot ETFs now that have been approved. You have Bitcoin futures, you have Ethereum futures. Can you talk about your product set now? Are you happy with what you've been doing? Is there more you can do, and how has demand maybe changed before and after the spot Bitcoin ETF approval?
Well, yeah, I think that, first of all, I'm a big believer that if you don't—the product doesn't have a use case, you have to make a decision on what you're gonna do with it. Because otherwise, if it doesn't have a use case, it, it can be deemed readily manipulable under the Commodity Exchange Act. And the last thing I'm ever gonna do is wanna follow the Commodity Exchange Act, and I don't wanna have something that could be deemed readily manipulable. So I'm not—I, I applaud the chairman's comments earlier about crypto. It's not about whether I like crypto or not.
The question is, I hate to hear that half of his enforcement cases are against crypto, and to me, that, that's troublesome. So I don't know where the growth in this is. When I listed futures in 2017 on this, I absolutely put so many restraints on it. I didn't think anybody would trade a 1 lot. I, I swear to God, I didn't think they would trade. I had close to 40% margin. I had functionality of Stop Logic, functionality on there, Velocity Logic functionality on there. I had limits associated with it, completely contrary to where the cash markets were trading, and it still manifested into a decent amount of trade.
But we are not even in the jogging stage of crypto at CME. I need to see a better use case. I think no matter what comes of crypto, the regulation, you're gonna have a good part of the population upset. You cannot have dominant people in financial services that are well respected. I don't care if you like him or not. I happen to like him, Jamie Dimon. I think Jamie's a really smart guy, and I think he carries a lot of weight. When people say that he just doesn't understand these product sets and that, you know, they're being driven up on pure speculation, it's hard to argue with it.
They're not driven up on pure speculation. Why is it that Coinbase listed a gold contract, a nano gold contract? Isn't that the antithesis of crypto? They're both supposed to be a store of value, that crypto was going to replace gold, and now they list a nano gold contract. So I find this kind of amusing to all the crypto buffs out there about what it's gonna be. So unless we can all use it in a way that's comfortable and it's got a great use case, I think the lifespan of this could be a little bit shorter. 'Cause I don't think you can have only a handful of people using it, and 40% or 50% of the cases at the agency on enforcement are in that division of crypto.
That's a tough sell for the people.
I think we have time for one more question. So I always love hearing your thoughts about market structure, Terry. So if we look out over the next decade, decade plus, we've heard a lot about AI this... today. What do you expect to be some of the biggest themes that will be influencing market structure over the next decade?
I think it's gonna be fascinating. I know the chair talked about this earlier in his comments about a little bit about market structure, you asked him. I actually think that institutional and retail are gonna blur. I don't think you're gonna be able to recognize the difference between the two, and it's gonna be due to basically because of technology. So if artificial intelligence allows me to have the same information as Ken Griffin, which I'll use Ken for the second time. I hope he's not listening to this, but appreciate everything you do for us, Ken.
But it now will make people, this younger generation wants to be in control of their own destiny. They're gonna be hard pressed to say, "Okay, I've made up some money, and I'm gonna give it to a bank to run for me," when they have all the tools, as they've been growing up, to do it themselves. Artificial intelligence is gonna give these people the ability to have information they never had before, so they can compete against Ken Griffin. It doesn't mean they're gonna be successful like Ken, because Ken might have different strategy associated with it.
But the information, the information that artificial intelligence, if it's done properly, will give it to us all on the same time span. So now it's up to us to determine what we're gonna do with it, and I think there'll be a big population of the retail that will embrace this. These younger people that are now in their twenties and going into their thirties, who will be our next market participants, will be deploying this, and, and I think it's gonna be a fascinating way to do it. So what does that mean for market structure? Do exchanges need to be more direct? I don't know.
You know, the FCM is going from 176 to, I think, it's right around 50, Rostin, it's, it's on the lower end. It's concerning. There's clients today, there's clients today that can't even open up an account at an FCM because they don't want them. So the banks don't want any of these people because... So what are we eventually going to do? We, we can't If the interest rates go down to a certain point, we're not gonna even maintain the 50 because they're living off the big. It'll be very difficult. We'll lose more FCMs, so market structure conversations need to be talked about.
When Sam Bankman-Fried, and I argued with him because I had different feelings about him, but I never argued what he was trying to do. I argued against the way he was doing it, and it's, it's a different ideology. So his ideas around market structure, I didn't have an issue with. I had an issue with him trying to implement that market structure into a rule set that had nothing to do with what he was trying to do. So he's trying to put a square peg into a round hole, and I thought that was wrong because the Commodity Exchange Act today specifically says, "Futures commission merchant," in its rule book, and he was trying to subvert that, and I felt that was wrong.
So it doesn't mean that the structure that he was thinking about was wrong. So I think that we're gonna continue to evolve. We're gonna have to have conversations with participants, regulators, and, and all, because we have to come together to figure out what that structure is gonna look like. I think everything has a shelf life. Everybody has an expiration date. Mine's getting closer, I'm 65. But I really believe that the market will change because people will demand, people want access, and they're not going to be shut out, and right now they are shut out.
So that's what I think, that's what I see coming down the pipe. But you don't wanna wait until it's too late. You wanna work and put good, smart rules and regulations in place so people know the rules of the road as we go forward.
Terry, I think we're out of time.
All right. Thank you so much.
Thank you so much. This has been great.
Appreciate it.