A new era is approaching for US futures exchanges. Analysts predict that the end of the Federal Reserve's restrictive monetary policy could significantly alter the risk management needs of market participants, and thus the demand for futures. At the same time, new competitors are trying to disrupt the established dynamics in the sector. Howard Lutnick is making waves. The CEO of trading firm Cantor Fitzgerald aims to shake up the interest rate futures market with the new FMX Futures Exchange, which received approval from regulators in February, and is set to launch in September.

CME Group – currently handling over 99% of US interest rate contract volumes – shows readiness to confront the new challenger. The financial heavyweight reported a record revenue of 1.53 billion dollars for the second quarter, with net income rising by 13.6% to 883.2 million dollars. CEO Terrence Duffy talks about „escalating uncertainties“ in the markets.

Volatility indices at the exchange, which track both treasury and overnight markets based on the Sofr benchmark, have recently surged sharply. The Treasury Volatility Index, which mostly ranged between 50 and 100 basis points earlier this year, has recently spiked towards 200 basis points. The index for Sofr volatility has climbed to 175 basis points.

This development is causing ripples across financial markets. Trading volumes and open interest at CME have grown across all asset classes for the first time in over a decade. Trading is booming due to speculation about a shift in monetary policy by the Fed. Average daily volumes of treasury futures and options jumped 36% to a record 8.2 million contracts in the last quarter, and continued to rise in July. There has also been increased activity in futures trades, with participants betting on movements in Sofr or the Federal Funds Rate.

However, investors now fear that the boom in interest rate futures might soon end. Although the Nasdaq-listed shares of the Chicago-based exchange operator had been rising sharply in the early months of the year, they have come under significant pressure since May and have even fallen below the levels seen at the beginning of January. This has caused CME to lose its position as the most valuable US exchange, with its market capitalisation standing at around 75 billion dollars. The Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange (NYSE), boasts a valuation of around 90 billion dollars.

There are concerns that history might repeat itself. Past monetary policy cycles have often triggered trading booms, but once the policy changes became reality, trading volumes in futures often declined, impacting CME’s profit growth. Analysts from Bernstein Autonomous point out that even a flat development, without a significant drop in trading activity, could be enough to significantly impact CME's momentum.

Chicago-based CME Group has focused more intensively on its role as a market operator compared to competitors. In the last quarter, around 82% of revenues came from clearing and transaction fees, sometimes nearly 90%. In contrast, market data and information services contribute significantly less. For ICE, which has a leading presence in the stock listing market with the NYSE, only 48% of revenues come from transaction fees. Analysts now worry that CME might not be sufficiently diversified if there is a swift change in interest rates.

Tim McCourt, Global Head of Equities, Foreign Exchange and Alternative Products at CME, dismisses these concerns. The executive emphasises that „a lot of risk remains in the market.“ While he is reluctant to speculate on the development of trading volumes and open interest, he underscores the strong demand for hedging solutions in a volatile environment.

Even if the Fed cuts rates in September as some expect, market participants are divided on the future direction. Recently the futures curve for Federal Funds products at CME was completely in contango – each monthly contract was more expensive than the preceding one, indicating expectations of continued rate cuts. However, there is no consensus on the magnitude of these rate cuts, which leaves room for speculation among futures traders.

McCourt also points out that US elections and longer-term trends are likely to drive volatility. He anticipates continued strong increases in government spending, which the Treasury has recently financed mainly through short-term securities. In the long term, it will likely aim to balance the curve. „Investors will have to risk manage a higher amount of long-term debt that needs to be serviced at discretely higher levels than prior periods“, McCourt explains, stressing that CME is well-positioned for this as its major products are linked to the long end of the curve.

Additionally, the CME has been attracting highly active retail investors with Micro Futures, which represent smaller portions of standard equity, bond, commodity, currency, and crypto contracts. Recently, Micro Gold and -Copper products have reached record levels of open interest. For more agile investors, having liquid products across all asset classes at the same exchange is advantageous, avoiding the need to switch between market operators, McCourt points out.

CME Group CEO Duffy points to the savings available to investors through margin-offset programmes. These reduce the amount of collateral that brokers need to deposit with the clearinghouse for their clients by offsetting margins. The Chicago-based exchange has multiple agreements in place to facilitate this, including an expanded cross-margining partnership with the Depositary Trust & Clearing Corporation, which is a key player in the settlement of government securities transactions.

But Lutnick's new FMX Futures Exchange already claims it will offer even greater margin savings through its partnership with LCH, one of the world’s largest clearing providers, and aims to attract investors with lower trading fees. Analysts from Rosenblatt Securities emphasise that market participants are frustrated with CME's ability to impose almost arbitrary costs – due to its monopoly position.

As competition in the sector intensifies, competitors like CBOE Global Markets have been pushing into new business areas for years. Known primarily for options trading, CBOE has been trying to break the duopoly of NYSE and Nasdaq in stock listings. Six years ago, CBOE moved its own stock listing from Nasdaq to its own exchange.

McCourt highlights that "NYSE and Nasdaq are also key components of the interrelated financial ecosystem we are all part of“. According to clients, the stock listing market functions well in its current form, so CME has no plans to enter this market. However, the Chicago exchange aligns its offerings with „clearly articulated customer demands“, as seen with its acquisition of NEX Markets in 2018, which expanded into the brokerage market. Observers of the world’s largest exchange operator do not rule out the possibility of it seeking new revenue sources.