BGC Group takes aim at 'heavyweight champ' CME exchange

FILE PHOTO: Howard Lutnick, Chairman and CEO of BGC Partners, speaks at the Sandler O'Neill + Partners Global Exchange and Brokerage Conference in New York

By Mehnaz Yasmin and Lananh Nguyen

(Reuters) -Brokerage BGC Group's FMX business is joining forces with some of Wall Street's biggest banks and traders to take on leading exchange operator CME Group.

A group of financial firms including Bank of America, Citadel Securities, Goldman Sachs and JPMorgan Chase made minority equity investments into FMX, valuing it at $667 million, BGC said in a statement on Thursday.

FMX currently offers trading in cash U.S. Treasuries and spot currencies. In September, it will introduce Secured Overnight Financing Rate (SOFR) futures, followed by Treasury futures in the first quarter of next year, Howard Lutnick, CEO of BGC and chairman of FMX, said in an interview.

"CME has 99% of the futures market in America, so they are the heavyweight champ," he said. "If someone says you can’t hit the champ, they’re not paying close attention."

FMX's market share in cash Treasuries is now 28% as it has competed with CME.

Other minority owners of FMX include Barclays, Citigroup, Jump Trading Group, Morgan Stanley, Tower Research Capital, and Wells Fargo.

BGC received regulatory approval in January to operate the futures exchange. The platform aims to compete with CME in the interest rates derivatives market at a time of high volatility in bond markets as investors debate the timing of the Federal Reserve's much-anticipated shift to lower interest rates.

CME Group first quarter profit beat analyst expectations on Wednesday, helped by record growth in futures and options contracts tied to U.S. Treasuries.

CME CEO Terry Duffy said his company was in a good position in comparison to FMX and will benefit from capital efficiencies.

"I've seen nothing but competition in my entire career, so this is no different," Duffy said on a conference call. "I take every single bit of competition seriously."

In recent years, brokerages and trading firms have joined forces to create their own exchanges after balking at rising fees charged by exchange operators.

"The largest users want both competition for price, and just as important, competition for innovation," BGC's Lutnick said.

BGC's shares closed up 1.5% on Thursday.

In the run-up to September, FMX will focus on signing up clients and connecting them to the new platform, he said.

Regulatory changes could also reshape the market. The U.S. Securities and Exchange Commission in December adopted new rules aimed at reducing systemic risk in the $27 trillion Treasury market by forcing more trades through clearing houses.

"Mandatory clearing is a great benefit to the marketplaces of the CME and FMX because more volume will come into those cleared marketplaces," Lutnick said.

(Reporting by Mehnaz Yasmin and Niket Nishant in Bengaluru, Lananh Nguyen in New York, additional reporting by Davide Barbuscia and Laura Matthews in New York; Editing by Shounak Dasgupta, David Evans and Michael Erman)