What Is the FMX Futures Exchange?

What Is the FMX Exchange?

The FMX Futures Exchange, part of brokerage and financial technology BGC Group, Inc. (BGC), is a futures exchange created to challenge the dominance of the CME Group Inc. (CME), which had record trading in 2023 and early 2024. Backed by a firm with deep pockets, partial equity ownership from some of the world's top investment banks, and a clearing partnership with LCH, the London-based clearing giant, FMX is well-placed to be the first firm in memory able to challenge CME's near-total hold over U.S. futures trading.

FMX's futures exchange will be a combined platform for futures on U.S. Treasury, repurchase agreements (repos), and foreign exchange (FX) trades. The Commodity Futures Trading Commission (CFTC) approved FMX in January 2024, and it offers cash U.S. Treasurys and spot currencies. The goal is to provide a one-stop shop for traders looking to buy and sell various financial products. FMX says it will add secured overnight financing rate (SOFR) futures in the third quarter of 2024, followed by Treasury futures in early 2025.

The buildup of the exchange could take a few years, and FMX hopes to attract early adopters with low or no fees in the first year. "We hope a year from when we open, we will have all the players on the playing field and then it will truly begin," said Howard Lutnick, BGC's chair and CEO. It won't be until 2026, he said, "when everybody has all of the ecosystem completely connected," that FMX should be expected to start making a major dent in futures markets.

As these products suggest, FMX, for now, is not aiming for retail investors, unlike various online platforms such as Kalshi, but looks to build out with institutional and larger investors first.

History and Development of the FMX Exchange

Led by Lutnick, a significant player in the financial services industry, FMX was formed by BGC, which also owns the CX Futures Exchange, which offers weather derivatives. While FMX is new in the exchange space, BGC dates back to 1945 and has since grown into a major brokerage and fintech firm, selling market data for fixed-income securities, foreign exchange, and derivatives.

BGC has expanded in recent years by buying up electronic trading platforms and brokerage firms. This led to the Fenics technology platform, designed for trading and other market operations across various asset classes. The Fenics platform comprises electronic trading systems, market data services, and other financial tools for institutional traders. There's good reason not to wager against the success of FMX: BGC has an impressive history of creating successful electronic marketplaces, such as eSpeed, Fenics UST, Fenics FX, and Fenics MidFX.

Several factors drove the creation of FMX Exchange. BGC says it saw an opening for increased competition, greater market efficiency, and more integration with financial technology in the market. BGC thinks there's market share to be gained from challenging the dominance of established players in the U.S. Treasury and SOFR futures markets. There's little doubt their main target is CME, whose revenues doubled between 2020 and 2023. However, the CME itself has competition, including the Intercontinental Exchange (ICE), Cboe Global Markets (CBOE), Interactive Brokers Group (IBKR), and other markets for derivatives trading.

BGC's success with Fenics UST, which took a chunk out of the CME's significant market share in the wholesale U.S. Treasury market, showed it could have success taking on the derivatives giant. It's part of the reason analysts are paying close attention: BGC's exchanges already have deep liquidity pools (lots of trading), an extensive network of institutional clients and partners, and the scalable fintech it needs to compete.

FMX Purpose and Goals

For the FMX Futures Exchange to succeed, it'll need to be a viable competitor to the CME's four derivatives exchanges: the Chicago Mercantile Exchange, the Chicago Board of Trade, NYMEX, and COMEX. To do so, FMX will need to show it can provide traders with low-cost, low-latency access to key U.S. futures markets.

The decision to focus on U.S. Treasury and SOFR futures was based on their size and importance. Treasury futures are among the most actively traded futures contracts globally, and the transition from LIBOR to SOFR as a benchmark interest rate created a market opportunity. By offering an alternative in these markets, FMX Exchange seeks to attract a significant share of trading volume and set the ground for becoming a major competitor for the CME, ICE, and other derivatives exchanges.

To ramp up for this, BGC Group invested heavily in developing new trading technologies, risk management systems, and clearing infrastructure, which manages and finalizes transactions after they've gone through. The company also lined up secure partnerships with key market participants, including global investment banks and market-making firms, giving it a significant boost for the exchange's launch.

FMX Services and Offerings

The FMX Futures Exchange will offer interest rate and FX futures products, focusing first on the U.S. Treasury and the SOFR markets. The exchange will also trade futures contracts on two-year, three-year, five-year, 10-year, ultra-10-year, 20-year, 30-year, and ultra-30-year U.S. Treasurys, providing various options for managing interest rate risk exposure.

It will also have three-month SOFR futures contracts, targeting the growing demand for SOFR-based instruments in the wake of the LIBOR transition. The transition became necessary once LIBOR's credibility came undone after manipulation scandals and a decline in the volume of transactions used to calculate it. While LIBOR is based on the rates at which major banks lend to each other unsecured in five currencies and for several terms (overnight to 12 months), SOFR is based on actual overnight loans in the U.S. Treasury repo market, which means secured transactions. If there's ever a time to enter a market, it's when clients are changing systems and processes already.

FMX says its finished platform will pull together the following:

• FMX UST: An electronic marketplace for U.S. Treasury spot trading with tight tick sizes and deep liquidity.
• FMX FX: A single access point for the fast execution of spot FX and NDF trading with deep, multichannel, and configurable liquidity pools.
• FMX Market Data: This handles real-time market information harvested from BGC Group's financial ecosystem. It comes with price and analytic tools and the ability to create customizable data sets.
• FMX Repo: An electronic marketplace for repo trading that supports several digital forms of connecting to the platform and aims to deliver matched transactions meeting specific criteria in early trading ("true daily morning match").

What FMX's Future Market Entry Means for Investors

FMX Futures Exchange plans to offer lower exchange fees than its competitors to attract market participants. The fees, it says, will be simple and volume-based, which should translate into lower transaction costs. In addition, the exchange will have smaller tick sizes (minimum price changes), which could result in tighter bid-ask spreads and more granularity on prices.

Market participants will also have the ability to trade cash and futures. Trading both on a single exchange enables participants to offset positions or hedge across these products, reducing capital requirements and improving liquidity. LCH will also act as the central counterparty for transactions. This means that LCH will be the buyer to every seller and the seller to every buyer, meaning that as an investor. So, you don't have to worry about getting paid for your asset or paying and not getting the asset. Having LCH on board bolsters FMX's credibility as an ongoing concern, not just the trustworthiness of trading within FMX. In addition, LCH will provide the benefit of cross-margining, which allows participants to offset their positions across different products, leading to lower margin requirements. This, in turn, frees up investor capital for other uses.

Along with its investment bank partners, the LCH deal gives FMX legitimacy to proceed, attracting more liquidity and trading to the exchange while ensuring compliance with regulatory standards. This is all the more important given that the futures exchange market has high barriers to entry, making it difficult for new players to gain a foothold.

Technological Infrastructure: Fenics Trading Technology

The exchange's technology should give FMX Exchange users a fast and predictable trading experience. Users can access the market via different methods, including graphical user interface, FIX API, and binary API systems. The trading platform should ensure all trades are final and anonymous, eliminating the chance for a last look.

FMX will use the Fenics trading technology developed by BGC Group. Fenics is already used for order matching and execution, and it is offered for use with its U.S. Treasury, repo, and FX products.

The Bottom Line

After regulatory approval to operate in 2024, the FMX Futures Exchange is to launch in 2024. A subsidiary of BGC group, FMX Futures will leverage BGC's Fenics trading technology, existing partnerships, and client base to launch a challenge to the CME Group's dominance in interest-rate related futures markets, primarily in Treasurys and SOFR futures. With the backing of global investment banks and market-making firms, the FMX Futures Exchange could reshape the competitive landscape in these crucial markets.