Okay. Welcome back, everyone, to our 20th Annual Global Exchange and Fintech Conference. We've traveled around. We had Singapore, we've had London, we are back to Chicago, to the heart of exchanges in Chicago. It's my pleasure to have as our last exchange speaker, the Chairman and CEO of the CME, Mr. Terry Duffy, and I would say a good friend as well. You know, these market conditions, we started off by asking everyone to give sort of what they're seeing as in regards to the market and what's their outlook. You've done a good job at this and on your calls, the CME is so diversified.
I think that we pay more attention because you got more , you got plenty of skin in the game, whether it's rates, energy, equities, et cetera. I guess, Terry, your market outlook and anything else you'd like to say.
Well, first of all, let me congratulate you on an amazing career.
Yeah.
I know that you had a little reception yesterday, so congratulations.
Thank you.
I saw that you must be a big Carter Verhaeghe fan because they put number 23 on the Repetto jersey. For those of you who don't know, that's Carter Verhaeghe's number with the Florida Panthers. Congratulations to you.
Thank you.
My friend. You've been a real friend to the industry. You've helped promote the industry. You brought awareness to it, and I think like nobody else I've ever seen, and I've been doing this for an awful long time. When I took CME public in 2002, I don't think I've ever seen anybody with the depth of knowledge that you have. Congratulations on-
Thank you.
An amazing career to you, and thank you. I think on behalf of your colleagues, thank you. As far as the markets goes, Rich, I think there's so much going on. You know, I think a year ago, when we were on a call, you asked me what I thought was gonna happen in 2022, and I think we kinda walked through a few scenarios. You know, we kinda, you either say I was lucky or you could see some of this stuff coming, but it all came to fruition. We, CME, had a record year in 2022, and we were able to prosper from that.
You asked me what I thought coming into 2023, and I thought it would be a little bit more of the same of the end of 2022, and I think we're starting to see that as well. That's playing out. You know, I think the debt ceiling was something that gave people a lot of angst about what that means. I think we have just so much turmoil in Washington, and we're all so interdependent upon what is going on in Washington.
What, you know, nobody likes them anymore. If you go there, you'll see more private jets there than you do at Teterboro. That's not a good sign for the United States of America to see all those people there, because they're there for one reason, either to change a law, make an amendment, or put their hand out. Those are not good outcomes for business. I'm concerned about what's going on in D.C. I would like to see some more camaraderie, for lack of a better term. You do see it behind the scenes. When I go there, I do meet with both sides of the aisle, and it's pretty amazing when you see those folks talk. We're the polar opposites on the far right and far left.
They're dictating a lot of the opinion right now, and that's hard to deal with. I know Jeff was in here a moment ago. I don't know if he was talking about his potential deal with Black Knight, but, you know, he's been in that for quite a bit now, trying to fight through that process, and it's difficult, and it's difficult to get some things done. The question will be, you know, as you grow these industries, do you grow more organically, or do you look to do bolt-on acquisitions, or you look to do major deals? I think that's really where not only our industry, but many industries around the United States are looking right now because there's a bit of tension.
I mean, you think, look at Congress right now, they're sticking their nose into the LPGA and the LIV Golf. They're talking about antitrust issues there. These are two private entities, along with the DP World Tour, who are trying to come together, all of a sudden, Congress is now making this a political issue. You can see where this is kind of continuing to go. That doesn't bode well for business, in my opinion. Hopefully, we'll get people away from this. Sometimes it's just soup du jour in Washington, and I'm hopeful that's what it is today, and they'll move on. I know you're speaking with the chairman.
He's here.
At lunch, the SEC. Is he here, or is he doing video?
Virtual.
Virtual. It'll be interesting to see what Gary has to say. I mean, he's got some really interesting news as it relates to what he's done, you know, the recent announcements on Coinbase and Binance. You know, those are potentially businesses that people believe that it's a big part of the future of finance, and all of a sudden, they're coming under massive scrutiny right now. It'll be interesting to see what happens, again, I think there's so much uncertainty in the world. I don't see that going away. People talk about CME as a volatility play. You know, I think volatility plays such a small role in what we do. So many businesses have so much inherent risk on everything they do.
You know, I always tell people, "If you try to manage risk after the event happens, it's way too late. You're either buying highs or selling lows because the event, they're gone." You can't hedge risk after the event. People need to become more and more involved in managing their daily risks, and I think we're in a good place to do that, whether it's a swap transaction that we get the lay off in. When you look at some of the third-tier banks, like SVB and Republic, and those who don't traditionally do futures, they do swaps because of accounting laws. Those swaps normally transition into volume for CME because they're dealing with the banks, and the banks do the layoffs with CME.
You know, I would hope that they would continue to manage their risk more properly because it's in our best interest to not have just 4,300 banks in the United States coming down from 30,000 in 1950. There's a big drop-off in the banking industry, not healthy. These are, sounds all negative, but it really isn't. I think there's great opportunities when things like this happen. CME is trying to position itself. You know, we've always said that we kinda stay in our, in our lane, but at the same time, we look at opportunities that, you know, can come outside of our lane. We're not trying to buy revenue streams. You know, I always tell people, my investors: "You can buy your own revenue stream. That's not what you're looking for me to do for you.
You're looking for me to grow my business so, you know, I can take my 67% operating margins and continue to build on them and pay you. That's kinda how I'm focused on it.
You've been an advocate for risk management. what do you call, published a, I don't know what they call it, editorial,
letter, yep.
to the F.T.?
Yep.
To me, it's obvious we're in market times that are so uncertain, so volatile. Some volatile at some time, and maybe not volatile, but certainly uncertain. What was like the trigger behind that, and how has it been received, I guess?
I guess it goes back to some of my earlier comments. I think. You see a lot of people, especially in the marketplace today, that have never seen an event they didn't like, you know? The question is: If the market downticks, we just buy it because we'll always make money, the Warren Buffett way of making money. Well, in the meantime, if you're not Warren Buffett and you have a limited amount of money, you can't sit around forever because you could get blown out on a lot of these scenarios. I just started looking at this where I said, risk is the new alpha, meaning that people need to understand how they're gonna manage risk.
They have to understand markets have two sides to them, and it's not just always up and, you know, hockey stick to the right. I think we got a little, you know, carried away a little bit with the cryptocurrency moves, and people just got excited about anything. You had the meme stocks trading wildly like that, these whole new breed of traders coming into the market really were uneducated on risk. For me, it was more writing something that says: Listen, there's a way that you have to understand risk, and it's a big deal. Understand both sides of the market. That was more of the reason why I'd had no idea that literally within a month, SVB was gonna blow up, Signature Bank, and Credit Suisse was going bye-bye.
You know, I mean, I didn't know any of that was obviously going to happen. Again, I think that's goes to the point where you have to manage your risk before these events ever could happen, and you hope they never happen anyway.
There's been a lot of talk about you know, the banking crisis and what will result, come from the banking crisis.
Yep.
I think the CME, if you're like the rest of us, still trying to determine, you know, what potential regulatory changes can come out of it, who could it impact? Overall, I guess, can you just talk about, I guess, the risk management of this whole mid-tier banking system? You know, whether it sets up for you afterwards, we'll see. I think it does speak to risk management, that none of these banks were hedged properly.
No.
Because-
Not, not even close. I mean, when you sit in an environment of 14 years plus of zero interest rate environment, you get an uptick or two in yields, and people are sitting on piles of money. They think: "Okay, well, now I can make some money off that money," and they got into some longer duration. We all know what happened, so I don't need to rehash that. To think that people weren't gonna ask for their money because they don't wanna take your 1% or whatever you're sharing with them, or less than that, and they want the full 5%, 'cause that's what the government's paying overnight, and think that couldn't happen, I don't even know how you can run a business that way. I mean, it's just, it's really irresponsible.
All they had to do was sell futures against that position, and all would have been forgiven, you know what I mean? It would not even. The $1.8 billion that SVB lost in the duration risk could have been offset easily in a quick futures position or a swap, and they didn't do either. What they did was they moved their risk parameters further out in their tolerance, so the red flags were not being shown, so there didn't appear to be a risk. I mean, that reminds me a lot of what happened in 2006 and 2007, right? I mean, everybody's. We saw the movie. There was a lady dancing on a pole, and she owned five houses, right? Probably a bad idea, you know. That was a movie. I didn't say. That was a movie, not me.
I didn't say that. The Big Short. Blame Christian Bale for that one.
We'll strike that from the record. No.
No, leave it in. It's fine.
You know, overall, that could present opportunities. Again, I, maybe you know, I don't think, or at least we don't know the exact parameters of the opportunity, but again, they didn't risk manage, and there's gonna be some regulations that's gonna change things and try to help push risk management, than we suspect. But I guess when you look at overall, you know, growth opportunity, like you have, I would say, I don't wanna be disrespectful to the other, but the strongest product set, the most impenetrable, that's the word I'll use, structure. How do you continue to grow the CME? You've done a great job with sulfur, the sulfur transition.
The energy products are gonna be, you know, facing much easier comps after a little drought, because people pulling back from trading last year. Terry, what do you see as good growth opportunities, you know, for 2023, and if you wanna look out longer?
Yeah, I think you have to look out a little bit longer.
Mm.
Because I think one of the things that I've been talking about with my team, especially John and I, and our new CFO, Lynne Fitzpatrick, is, what do we do as far as when we look at the overall markets and you look at the cash markets that are associated with the derivative markets? The cash markets seem very inefficient, and they're in a way that they've been kinda doing things the same way for 100 years, right? I truly believe markets always evolve, and you don't have to just evolve in trading of equities or trading of futures. I think cash has to evolve as well. I think it's gotta become more modernized, more, just more efficient.
I wanna look at ways to continually work with the cash market participants on how we can make their markets more efficient, and in return, I think that helps us with the futures market. You might say that might be good for all the exchanges. It could be, but again, I'm a big believer in the ecosystem, which I'm okay if the other institutions grow, as long as we grow with them. I think we always will, and that's the beauty of it. I'm rooting. Like, when someone said, "Well, look what happened with LME," I mean, you know, why don't you go buy them now because they're underneath? I'm not happy about that. I want. That's part of our industry. We don't wanna see stuff like that happen.
I wanna continue to work with the industry to grow it from all sides of the world. I think focusing on cash and different products and how we can make that efficient, only makes the derivatives even that much bigger, so we can continue to do that. That plays into the prior question with the banks. On the second and third-tier banks, I think there will be regulation coming their way. The question will be: What does that regulation look like? It never looks good from somebody who went through Dodd-Frank from start to finish and testified through that process. The pendulum is way over here. Walt was there, and the pendulum, you know, gets. You gotta get it to the middle, but that takes years to do so.
I think that because they fought regulation or just didn't participate, and this happened, they'll probably get regulation they don't like. For us, it's more about showing the efficiencies in the marketplace to grow our marketplace, and I think we can do that in cash, do that with second- and third-tier banks and others.
You, you've mentioned that, you know, I'm gonna get to speak to Chair Gensler right after. If anybody's connected, I know from my years of experience, far is that is in touch with the regulatory environment and the legislative picture to you, with the. Yeah, as part of, I think, staying in good contact with how market structure is evolving down there. What's your view on, you know, what's gone on with the crypto industry? Nothing really impacts. Is it fair to say it's been a non-event? Even you have futures, but it's been a non-event in regards to the impact that you're, you know, on the CME itself, but maybe the process of what's gone on.
Well, just think about where we were at a year ago in this room. I was sitting here with you. The gentleman coming in behind me was Sam Bankman-Fried. I was sitting right there where your colleague is sitting.
Yeah.
We were in a you-know-what match over what he was trying to effectuate in Washington. The industry has gone through so many different iterations, and when you look at when Chair Gensler announced the charges against Coinbase and Binance the other day, then you saw what the. My son, who's interning with me in our crypto division, with Tim McCourt, said: "Dad, why is Bitcoin rallying?" I said: "Because Bitcoin's not under investigation, as Coinbase and Binance are, not the product." Everybody took the product and decided to dump it. If you saw the first $2,000 of trade in Bitcoin was down to $25,000, the next trade was $27,000, literally that fast. I think the whole cryptocurrency is starting to evolve, that world, into a couple currencies.
This is kind of what we thought was gonna happen all along. That's why we've stayed with Bitcoin and Ether, because we felt that those would ultimately be the successors in a best use case scenario. I think that's where the market is shaping up to. The markets are pricing in that. You could throw as much bad news as you want at this, and it seems like those two seem to be holding on to rather... You know, the rest of the 10,000 different currencies that people come up with are lingering, and they're gonna continue to linger and go bye-bye.
I think that's kind of where the industry is shaping up to, and then I think the whole blockchain argument about how you deploy this, other industries are looking at that, and they're also looking at it with artificial intelligence, from the medical industry to other industries, about how they can make it more efficient. I think it's quite fascinating what's going on right now, and I don't mean just in crypto, but I mean in the technology that's used on crypto. I think it's down to a couple of the currencies of Bitcoin and Ether that are gonna prevail for the next several years anyway.
Yeah, I mean, it's, the process there has been pretty interesting as well, but.
Yeah, well, you look at what Chair Gensler is trying to do and what Chair Behnam's trying to do about the regulation of that, the only one that's not being argued about is Bitcoin and Ether, because they've already been decided that they're derivatives, and they'll be regulated by the CFTC. Everybody's agreed to that. When you get certainty of regulation, people will migrate to those products quicker. When you have all the uncertainty, is it a security? Is it a derivative? People are trading things, and they don't know if they're in violation of a regulation, it's a little bit difficult, as a fiduciary who's running money, to put money into something that you might be violating and be part of a lawsuit, like people are right now with Coinbase. They gotta get clarity there.
It's, I think that's probably the only unanimous thing is we need clarity. it's just.
It's hard to get.
Yeah, Well, you know the political process, legislative process, 10x better than I, but it doesn't seem like anything's coming quickly. Anyway, back to the CME, just a couple more questions.
Yeah.
The, you mentioned cash products.
Mm-hmm.
You own a cash, treasury platform now.
Mm-hmm.
You sort of hinted at, you know, how, you know, it plays a role in how you look at the derivative markets as well. You know, is that a potential area of expansion for the CME, more on the cash side?
I think it's more of a potential of efficiencies for CME. When you look at are we trying to get into other platforms like we did with BrokerTec and EBS? No, we're not seeking those out, but if they come our way, we'd evaluate them. I think what we're looking to do is how do we work with them to make the markets more efficient? Meaning, how do we get more of the margin offsets? How do we get make capital efficiencies more useful for the client base? Capital is becoming very intense, and with the cost of money today, it's even more intense than it's ever been. You, you need to be efficient with it.
I truly believe if people are gonna grow in this world, they have to work with both sides of the trade, and that means cash derivatives and others that have an affiliation with them, whether it's ETFs or whatever it may be. I'm a big believer that's how we can grow our derivative business. We have a great franchise, as you pointed out at the beginning. I think we'll be part of solutions as it continues to go in the efficiency game, and I think that's where the world's gonna go. It's gonna continue to seek efficiencies through technology, through partnerships, through offsets, and CME sits in a very strong position to be a part of all of those. That's where I think it goes.
I think you just stole my wrap-up right here. You just sort of gave. I guess where I am gonna wrap up and say that Terry has been not only a force at the CME, but also, and I got all choked up about this last year, but in other things is, you know, with developing other leaders at the CME is one area, but even away from that, women's equality with what you've done with the LPGA. You've taken, what I would say is, you know, a platform that gives you a chance to be a spokesman and for, you know, you could say, societal change as well. If people aren't aware of that's what Terry's doing in November and throughout the year as well.
Throughout the year, we know we're fortunate at CME. We were partnered with St. Jude Children's Research Hospital, and, you know, I'm convinced that they're gonna eradicate children's cancer over the next several years. They continue to work hard at it, and if you really believe and you really care about a future, you should care about the kids, and I do. At 64 years old, people would say: "Geez, what are you getting involved with this for?" I think it's really important that we all participate in the future. People could talk about that all they want, but put your money where your mouth's at. When it comes to women in sport, I did a panel yesterday on branding in Chicago, and we talked about this a little bit.
I was on with Mollie Marcoux Samaan, the commissioner of the LPGA. They asked me about, you know, equality and things like that. How do I feel about the announcement with LIV and the PGA? What was my first reaction? Mollie said that she was surprised. They asked me what my first reaction was. I said, "Human rights." I don't mean that pejoratively in a way that, you know, the Middle East is bad or it's good. I just. That was the first thing that came to my mind. If you're gonna have a partner that is basically affiliated with a global game, but it seems primarily a U.S. and European game, now accepting a partner from the Middle East, how does that work?
We have $189 billion-$190 billion of trade with Saudi Arabia today. Is anybody raising red flags about that? What about all the things that are going on in China that are unacceptable, but yet we get all of our antibiotics from there to save our lives as people are protesting about that? To some degree, yes. We either have to try to be part of a solution or not, but I don't think golf is. My was more human rights, and I'm concerned that women's equality continues to get put to the side.
If there's gonna be a pot of $3 billion or $4 billion coming into this country, I told Mollie yesterday, I said, "You better have your damn hand out, because those women deserve it as much as the men do." You know, at CME, we got two people doing the job, one's a man, one's a woman. We don't pay them any different. We pay them the same, and that's the way it should be. We have a very diverse workforce. We have a even more diverse client base, and when you're in 200+ countries around the world, you know everybody doesn't look like you that's participating in your marketplace. You make sure that you understand everybody has different scenarios.
I think it was the principle of this equality thing that definitely, that I see every year, you know.
Mm-hmm
In that tournament. One last question.
Yep.
As we've talked about this, but, the development of leaders, what's next? You know, whenever that day, whether it's, you know, 2025 or 2027 or 2030, but the development of leaders at the CME, I know you made a number of management changes.
Yep.
Uh-
We're getting old.
Tell me about it. Your contract goes to 2024?
Yep.
You know, hopefully, you extend, but how-
I'm gonna have to run for mayor of Chicago. Man, that place is just a gong show.
I firstly, I think senator from Illinois might be.
No, no. No, I don't wanna be one of a 100. I wanna be one of one.
I think that would be a good role. I think you're higher level of that, but I'll.
No, I mean, for myself, you know, I've been doing this for 43 years now. It's hard to believe I started in this business at, you know, 20, 21 years of age, became a member of CME when I just turned 22, traded for 23 years. Now I've been doing this for the last 21. It's been a long role in this business. I've seen so much change. You know, I'm one of those people that I always tell folks, "Always look at the exit, how to get out of something before you get into it." These are some of the things that I'm trying to teach some of my younger management team. Anybody can find a deal and say: "Okay, let's get in there. That sounds good." How do you get out of it?
Mm-hmm.
Understand how to get out of something before you ever get into something. I'm always trying to remind people how to do that. I think John and I, Patrick Mollie and I, have had a good working relationship all these years, so we're trying to transfer that wealth of knowledge about how you move the company forward. Until that day, we feel confident about that. That is one of the reasons I asked John to stay on longer, to help mentor Lynn, to get more involved in that. I wanna do that for our next CEO, whoever he or she may be, and I wanna make sure that they understand that you need to have some of those principles, because it's so easy, Rich, to throw the spaghetti against the wall and see what sticks. Then, that's not.
I always tell people: "Hope is not a strategy." You know, hope is something that I use in my prayers at night, but it's not a strategy. We'll see what happens. Right now, my board has asked me to, you know, continue, and I said, "I'll stay as... Until we have the right replacement.
I think the CME is in good hands to at least End of 2024.
Well-
Beyond that as well, as you prepare the next level of leadership. It could be you longer.
No, I'm old. I'm old!
Anyway, we're gonna wrap up here. I thank you for.
Thank you.
... friendship and watching the leadership-
Congratulations to you again.
... of a great organization, a great enterprise, over the years.
You're the best.