Terry Duffy sat down with FOW at last week’s FIA BOCA global cleared markets conference in Florida, and outlined the firm’s thinking about new markets and client behaviour through increasingly uncertain markets.

Duffy has been leading CME Group for more than two decades, since being named Chairman of the Board in 2002. It was as Chairman that he led the initial public offering of the parent company after demutualisation at the end of 2002. He became Executive Chairman in 2006 and oversaw the merger of the Chicago Board of Trade and the Chicago Mercantile Exchange in 2007, before adding the New York Mercantile Exchange to the group in 2008. Duffy has served in the chairman and chief executive role since November 2016. He began working at the Chicago Mercantile Exchange in 1980.

In that time, he has seen many ebbs and flows in the markets that CME oversees. The exchange has built the largest traditionally regulated crypto market, and has announced that it will start trading its cryptocurrency futures 24 hours a day, seven days a week. The firm has also launched a new event contract marketplace in partnership with FanDuel. The hourly contracts began trading in December.

The firm has also placed itself at the center of efforts to support a shift to mandatory clearing of the vast US Treasury bond market, set to come into force from the end of this year. CME in December gained approval from the securities regulator for CME Securities Clearing, after in July starting testing with clients. The Chicago-based group launched in January 2024 a service with the Depository Trust & Clearing Corporation (DTCC) to cross-margin DTCC’s cash Treasuries, cleared through its Fixed Income Clearing Corporation (FICC), and CME’s US Treasury futures and options. They followed this by expanding margin recognition between the markets last year.

After launching “spot quoted” futures, the next move is a return to single stock futures it first tried to bring decades ago. Single stock futures are planned for this summer, covering more than 50 of the top US stocks drawn from the S&P 500, Nasdaq-100 and Russell 1000 index universes.

On the technology front, the exchange agreed in November 2021 a comprehensive ten year partnership that included the migration of CME's vast trading data resources, its matching engines and clearing business to Google Cloud.

In June 2024 the firms announced the creation of a Google Cloud Platform region based in the Chicago suburb of Aurora as well as a co-location facility.

As the industry looks to harness exploding demand for access to products and a regulatory shift in the US aimed at fostering innovation, FOW asked Duffy to outline the key principles guiding the company through its next phase of growth.

The CME – and yourself – have been involved with a series of innovations and challenges for the listed markets over the years. When you look back at how you have negotiated those pitfalls and built new markets, are there any key principles that guide your thinking today as we look at new changes being proposed?

That’s a pretty broad question, and I couldn’t sum it up if you gave me a day to do it – that’s how strategically important I think it is. I try to lead by example and have a good moral compass, and most importantly make sure we understand the risk management needs of our participants. We don’t try to figure out what could make the markets go up or down, we figure out how participants can best manage that market risk on our platform.

I think in the case of crypto, we still see a lot of launches and applications that are focussed on wanting to have an influence on the price of a given cryptocurrency. To me the value is in the use not in the price of the product, so the CME approach is to understand the use and then we can build tools and applications around that to make it successful. It’s ultimately up to the user base and the fundamentals of the market to determine the price.

What we also try to do is take technology and integrate it in a way that enhances the value of the experience of a product. A good example of that is the deal we did with Google. I didn’t just jump to putting everything at the CME into the cloud, which would have been irrational. We have spent the last five years working together and learning a lot from each other. When you do that through a thoughtful process you come up with a product that is better.

The CME has a market cap of over $110 billion (£82bn) dollars, and I have 3,500 employees. That’s a small employee base for such a big company and that means that everybody has to be singing from the same hymnbook - we have to be pulling in the same direction and I think that is a big part of what the CME stands for.

Thinking specifically about the prediction markets, which has been a dominant topic at BOCA this year, how does that feed into the approach that you have chosen for the firm?

As a former trader, it is really important to me that we also focus on credibility in the marketplace. I get very concerned when I see people doing what I think is violating Core Principle 3 by listing contracts on markets that I think are readily manipulatable or in the language of the statute “more susceptible to manipulation”. I see that in the self-certification process at the CFTC, which is being inundated with prediction market applications that are getting out of the door within 24 hours. The user doesn’t really know whether these products are being vetted properly and I don’t think that’s a good thing.

I am not a fan of how the self-certification process appears to have been abused. During the Commodity Futures Modernisation Act of 2000, we were actually proponents of having it but I think we have gotten to a level that is way beyond the intent of the Commodity Exchange Act.

We have to make sure that we are running credible markets, and that everyone else that is going through the process of getting regulated and getting products certified is operating on the same level playing field. If someone gets sick in this world, it seems like we all catch the cold. I’m a big proponent of regulation – bad regulation will eventually go away, but good and smart regulation is what drives markets forward and is sustainable for a long time. I think when you look at the oversight of our markets we as a firm take that very seriously. Since we don’t directly participate in our own markets and never have, we are the neutral facilitator of risk. That is a very important part of our role.

You led the field with rolling out portfolio margining for your risk models, and have a series of other margin offsets you have added in recent years. When you look at what is going in the rates and commodities markets, does that put clients in a better position to weather this uncertainty?

I don’t think I see it so much as a safety net to get people through tough times, I think what it does is emphasise the offsets we now have with portfolio margining. We now have about $80 billion dollars a day in savings across swaps, futures and Treasuries through the FICC cross margin recognition program. To me, from a risk management standpoint, I don’t know if that buffers the system but what it does do is free up capital for other needs. It helps the system if deployed properly.

You mentioned the extension of the partnership with DTCC/FICC, and you have your own Treasury clearing service going live to service cash markets, how are you thinking about mandatory clearing as it comes into force starting later this year?

It’s really another spoke in the wheel of progress in efficiencies that we have deployed in the marketplace. I’m excited by that, and clearing for us is just another example of the beauty of what we have built here at CME – the optionality. I like DTCC and I want to do more with them because there are further efficiencies to unlock. At the same time, for me to have a cash clearing licence is very important just in case the paradigm shifts. I need to be ready to support that, and clients that for whatever reason prefer to clear with us can do so.

Another way to look at that is to think about the proliferation and growth of retail market. The reason why that has happened boils down to access – small clients just didn’t have access to FCMs or other brokers in the same way before. Other firms came along and gave them that access to the marketplace and the clearing of cash Treasuries is the same, people may want to have choice in how they access these markets.

It seems to me like the some of these innovations – like prediction markets – are creating a bit of a pivot point for the industry, can we also call that a way to provide access or democratise the market? Seems like there is a good way and a bad way to go about it?

I’m not sure I’d describe this as a pivot point, but what I will say is I’ve learned that the bad way doesn’t last. When you look at prediction markets, I still think there is such a lack of clarity: the scope of online gaming, Tribal and State Laws, Federal Law, regulatory oversight, Core Principle 3, are all uncertain today. There are a whole host of things that need to be done to go forward before these markets can properly develop.

In my mind, the reason you are seeing prediction markets largely based around sports is the younger people participating. It is a peer-to-peer system and they seem to be more comfortable with that type of process. The price disparity is inherently an odds-like or probability framework. I do have an issue with the nomenclature (for lack of a better term) around these markets as they are working today. I do think you need clarity. I think the industry is going to need it and that is yet to happen. They need to make a determination about whether this is gambling or not, and people feel very strongly both ways. Until you get continuity, you will never have a really good, functioning market.

I was interested in what you had to say on your panel about tokenisation and more specifically around the need for a digital coin on CME, what is the use case there for you?

This comes back to efficiency. As markets appear to want to be trading around the clock - and we will move to 24/7 for crypto on May 29 - we need to figure out ways to facilitate risk management as well. Right now, the only way to do it is to pre-fund on a Friday for the weekend or before a holiday. The question is, can you find other means of collateral that can help bridge that period where there is no access to bank wires and things of that nature. We do have real-time payment systems that right now are sufficient to oversee the size of our crypto franchise. But that is just for CME, and we couldn’t for example list other products and use real-time payments because that system is not big enough to support the other asset classes. Also, if others start to use the same service then our share of capacity would go down exponentially – like the continuous linked settlement (CLS) payment framework in FX.

I believe that when you have a digital or stablecoin payment system in place, you have to offer up different forms of that. So we will have tokenised cash through the proprietary ledger of Google, we will hopefully have a stablecoin and then we will also have the other forms of collateral that we accept today.

From my standpoint, if we do list our own coin, it will be very small to begin with. I don’t want people to get out of cash, Treasuries, gold warrants and other forms of collateral just to take CME Coin. People do have different needs and ways they want to post collateral, and I want to allow them to do both. I also believe that it is going to be hard to get to a single form of margin on stablecoins, which is another reason to start small.

The way I look at it is that it will be an ecosystem coin, even though I would like to have it on a distributed ledger. I would not want it to go outside our FCM/clearing member network. The other issue we are working through is whether we want to file for this with the Office of the Comptroller of the Currency ourselves or whether we want to go with an existing registrant and use their services. So we are evaluating the best options from a commercial perspective and we will find the best way forward. The timing is obviously still open, but hopefully by the end of the year we will have something that addresses this use case.

You have announced the listing of single stock futures this Summer, which is a second bite at that segment for you. What made you want to try again, and what is different this time?

When we first brought these contracts in 2000, the timing was bad. There were three parties involved, and it wasn’t going to work in the environment that we had at that time. It was the first product to be dually regulated at both the SEC and CFTC, and people didn’t fully understand what that meant. Today, the world is very different. The prospect of using single stock futures today is very exciting, there are firms that already do a lot of size in these instruments in Europe and that shows how big the appetite could be. I think people can get past the regulatory regime now, and the reason that I say that is because our customers today are much more likely to be registered to trade securitised products and futures through both agencies. That is what we didn’t have in 2000, and that is why I think these will be really successful.