Market Structure Matters: A Conversation with Tim McCourt, CME Group
As market uncertainties continue to increase, risk transfer velocity through futures and options trading is growing exponentially across all asset classes, from fixed income and equities to FX and cryptocurrencies.
“Every year seems to be bringing new uncertainties, new challenges to the market,” declares Tim McCourt, Global Head of Financial & OTC Products at CME Group, in an in-person interview with Coalition Greenwich Head of Market Structure & Technology Research Kevin McPartland at CME Group’s offices in New York.
And if that is throwing up increased regulatory focus in some asset classes, it’s also leading to innovation in risk management in others.
To Clear or Not to Clear
Take the U.S. Treasuries market, where central clearing in both cash and repos is top-of-mind for market participants. “The risk transfer velocity is only continuing to increase,” says McCourt, pointing to record levels of futures and options activity in U.S. Treasuries at CME Group.
“We believe in [the benefits of] the centrally cleared model. But mandates aren't a one-size-fits-all approach. ,” he explains.
He points out that unlike OTC clearing, which was essential to address the “tremendous inefficiencies and risk” following the global financial crisis, “a lot of those capital efficiencies are already being tapped into” in the U.S. Treasuries and repo markets.
Basis Trade Essential for Risk Management
As for regulatory concerns over risks in the basis trade, McCourt believes it is erroneous to use the 2020 “dash for cash” as a reference point, given the changed scenario today. For while the Treasury market has grown enormously post-pandemic, the “ratio of marketable debt in the U.S.” as represented by the short open interest carried by hedge funds “is not growing at the same pace.”
“You have to look at it proportionately… It's much more important that the basis remains a functional tool to keep that market in line so people can manage their risk across the various interrelated liquidity pools,” he asserts.
A SOFR Future
Meanwhile, risk management activity is growing in SOFR futures now that the transition from Libor has concluded smoothly.
“This is really the start of the SOFR story, not the end. Think about how many chances does an industry get to have another bite at the apple for market structure? We have all these lessons from the last four decades in the Libor-based ecosystem that we now get to revisit through SOFR,” says McCourt.
Unlocking Capital Efficiencies in FX
He also expects CME Group to move into “a period of innovation” in the FX market to “unlock capital efficiencies” besides “engaging around the clearing questions for FX.”
“With UMR [uncleared margin rules] becoming more and more important, and access to capital more and more expensive, unlocking those capital efficiencies is only going to become more important to clients,” he states.
Trading Options in Equities
What is futures and options data telling us about the equities market? According to McCourt, while equity futures remain the product of choice for professional and retail traders, options contracts, especially index options volumes, are growing.
“When you think about the macro environment or interest rate policy, or even the uncertainty we're seeing being forecast for 2024,” the growth in options “really speaks to that wanting to be more precise about managing your risk further out the curve or, conversely, being more opportunistic with your trading strategy,” he says.
Futures as Entry into Cryptocurrencies
Meanwhile, uncertainty over regulatory action is prompting many U.S. investors to consider futures trading as the doorway to cryptocurrencies. Certainly, CME Group’s futures ecosystem in Bitcoin and Ether is growing.
McCourt points to a key difference between other asset classes, where the wholesale market developed first before getting pushed down to individual investors, and cryptos, which started with individuals. “Now the wholesale community is trying to figure out how do they offer crypto products in the same way they do for other asset classes… CME Group futures are at the center of that,” he says.
As an operator of marketplaces, McCourt says he enjoys “the benefits of diversified inbound views” from CME Group’s various client segments. “That’s my primary source of intel of what the markets care about… [and] is sacrosanct for figuring out where we should be focused.”