CFTC Chair Says Still Assessing Clearing US Treasuries Abroad

The top US derivatives regulator is still assessing the risks of clearing US Treasuries abroad, an outcome that could impact plans by Cantor Fitzgerald LP Chief Howard Lutnick to compete with CME Group Inc.

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Bloomberg News

Isis Almeida, Lydia Beyoud and Katherine Doherty

Published Nov 19, 2024  •  3 minute read

Rostin Behnam Photo by Al Drago /Photographer: Al Drago/Bloomberg

(Bloomberg) — The top US derivatives regulator is still assessing the risks of clearing US Treasuries abroad, an outcome that could impact plans by Cantor Fitzgerald LP Chief Howard Lutnick to compete with CME Group Inc. 

The Commodity Futures Trading Commission continues to work with the Treasury Department on the assessment, Rostin Behnam, the agency’s chairman, said. His comments follow a letter sent by Democratic Senator Dick Durbin of Illinois — CME’s home state — warning the agency of possible risks to the stability of the US sovereign-debt markets should US Treasury futures be cleared in foreign jurisdictions. 

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Lutnick, one of Trump’s biggest cheerleaders on Wall Street, has lined up banks and other financial firms to support his FMX exchange. He plans to challenge CME’s dominance in treasury and interest rates markets with futures that will clear at LCH Group, a UK-based clearing house.

“We are still working with Treasury on the issues around like, what risks potentially offshore clearing of US Treasury futures plays, but haven’t come to any decisive conclusion,” Behnam said in an interview at the Futures Industry Association Expo in Chicago. “We’ll get back to the Senator.”

The comments come amid a heated battle between CME, the largest US futures exchange, and Lutnick’s FMX, an upstart with plans to launch rival contracts that clear in London. Donald Trump is expected to appoint Lutnick to lead the Commerce Department, Punchbowl News reported Tuesday, after his name was floated as a contender for Treasury Secretary. Lutnick has played a critical role in guiding Trump’s cabinet and other top-level appointments.

The issue over clearing has put him at odds with fellow finance-world heavyweight, Terry Duffy, the CEO of CME. Duffy has argued that US Treasuries shouldn’t be cleared anywhere else in the world. He took the issue to Treasury Secretary Janet Yellen and Securities and Exchange Commission Chairman Gary Gensler, Bloomberg reported last month.  

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In a separate interview, Walt Lukken, the CEO of FIA, said there are already other markets that clear in London and that his organization is not concerned.

“We support open access to markets,” he said. LCH is “a fully registered derivatives clearing organization with the CFTC, and abide by all the rules of that organization.”

Controversial Rules

The Democratic CFTC chair said he also doesn’t plan to push forward any potentially controversial rules. “I want to be very mindful in this transition not to do anything that’s either partisan or not really a broad support of the agency,” Behnam said at the FIA conference.

Specifically, the CFTC won’t finalize a rule to ban political event contracts before the change in administration, Behnam told Bloomberg News after his remarks. 

The agency had proposed a prohibition on not just politics but also sports and several other categories of prediction market contracts. But the agency’s two Republicans have pushed back strongly on the rule, which was being done in tandem with two different legal battles to block exchanges Kalshi Inc. and PredictIt from offering the contracts to trade. 

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Multiple exchanges, including Interactive Brokers Group Inc. and Robinhood Markets Inc., launched elections-themed trading in the weeks before the November US elections thanks to a favorable court ruling. The exchanges saw millions of dollars in trading volumes and the contracts remain popular as the political horse race shifts to questions about cabinet appointments, or who will win House Speaker gavel, and other political questions. 

“There are still issues to address” before the transition, Behnam said. “We have to govern, we have to deal with market issues. So we’ll continue, I would say, at a decent clip, as it relates to regulatory matters,” he added. 

Those include new rules that would allow futures brokers and derivatives clearinghouses to invest customer margin in foreign sovereign debt of Canada, France, Germany, Japan and the United Kingdom. That rule would grant a petition by industry groups who’ve been asking for the change, and say that the sovereign debt of the G-7 countries is low-risk. 

Behnam also wants to finalize a rule that would allow futures brokers to treat separate accounts with the same owners as distinct under different legal entities for the purpose of meeting the agency’s margin adequacy requirements. The change would benefit multi-strategy hedge funds and other investors who use multiple trading advisers.

Another proposal would strengthen requirements for derivatives clearinghouses to have robust recovery and wind-down plans in the event of bankruptcy.

—With assistance from Alyce Andres.

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