With the bulk of US financial reforms now in place, financial markets appear to be pulling out of their doldrums. Terry Duffy, executive chairman and president of CME Group, spoke with Jim Kharouf, editor-in-chief of John Lothian News, about his outlook for the exchange and the strong prospects for growth in the futures markets.

“The industry is really exciting right now,” Duffy said. “We’ve been going through some difficult years like all financial markets have. Now we’re getting some clarity around the rules especially here in the US and that’s very positive.”

Duffy said CME Group stands to gain from the migration of OTC trades onto exchange platforms with centralized clearing, especially in the wake of new rules and capital requirements for banks in Europe.

One of the things I’m excited about is, how do we create capital efficiencies within the Basel III system,” he said. “Whether you use the futures markets, or you use different types of markets, capital efficiencies are going to be critically important.”

With CME Group holding roughly $23 trillion of interest rate swaps in its clearing house, plus its full complement of cleared interest rate futures, Duffy said portfolio margining will serve as a tremendous capital efficiency instrument for firms.

“We’re already seeing saving from about 10 to 12 firms, with 180 clients involved, of about $4.5 billion in capital efficiencies just by putting those two portfolios together and negating some of that risk,” he said. “That’s where I think the business is going.”

Duffy also believes that futurization of products will create opportunities for the exchange as well.

“With futurization, you need to have transparency, and I think you’re going to see more and more people looking to use futures products versus some of the opaque bilateral contracts that they used to use in the past,” Duffy said. “Without having a CCP in the middle, managing risk the way we do, which is on a real time basis, twice daily marked-to-market if not more …. I think people are are going want to put their transactions into that type of environment.”

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