The CME's Terry Duffy on the Big Risks He's Seeing Now

Tracy Alloway (0:12)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:17)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

Joe, I can't remember, did you live in Chicago at one point?

Joe Weisenthal (0:21)

I lived in Joliet, Illinois. Oh. From the age of two to 12 Oh my gosh. Two to 11, yeah.

Tracy Alloway (0:26)

That's so funny. So I lived in Chicago for middle school, so I think like 10

Yeah, we probably overlapped. It's a great city.

Joe Weisenthal (0:33)

I love coming here.

Tracy Alloway (0:34)

And from a finance perspective, it is also an important city.

Joe Weisenthal (0:38)

It's an interesting and important city, absolutely. And so obviously, yes, when I think of Chicago, I think of trading and commodities in particular.

Tracy Alloway (0:47)

Yeah, and I feel like there's a lot of trading and financial infrastructure located in Chicago that has a great line of sight over what's happening in the rest of the system and the rest of the country. And so since we are here in Chicago at the ISDA AGM, we would be remiss if we didn't try to understand the perspective of the Chicago sort of trading market and what's going on in finance right now.

Joe Weisenthal (1:13)

Let's do it.

Tracy Alloway (1:14)

All right, so I am very pleased to say that we have the perfect guest for this episode. We are going to be speaking with Terry Duffy, Chairman and CEO of CME Group. Terry, thank you so much for coming on Odd Lots.

Terry Duffy (1:24)

And Tracy, Joe, thank you very much for having me. Welcome to Chicago.

Tracy Alloway (1:27)

Thank you.

Terry Duffy (1:28)

Welcome back, Joe.

Tracy Alloway (1:29)

Yeah, it's been about 20 years since I've actually been here. So it's weird, because I'm walking around, I see some buildings that I recognize and other things like this area where we are right now are completely new.

Why don't we start with some of the things that have been happening in markets recently? Because there is no shortage of headlines. You have the debt ceiling ongoing, you have the banking crisis, you have the Fed raising rates, although maybe it's on pause for a while now. Let's start with the banking crisis.

What's going on there? What do you see from the CME perspective? Because of course you deal with interest rate derivatives and hedges, so this is sort of ground zero for some of the asset liability mismatches that we've seen in banking.

Terry Duffy (2:10)

Yeah, so I don't know if I want to call it a banking crisis, because a banking crisis is traditionally systemic throughout the whole organization. This is something that's affecting mostly these second and third tier banks. So the other only one that has gone away in recent times is Credit Suisse, which was a major bank, but Credit Suisse has been advertised as having issues for many years. So I don't think that was a giant surprise to a lot of participants in the banking world.

As far as the third tier banks, especially, let's zoom in on a couple, I guess.

You know, one of the couple of things that I've said about, especially Silicon Valley SVB, is it's really amazing to me that the banks who are in the interest rate business, in the lending business, I'm in the interest rate trading business, hedge risk management business of interest rates, and they're in the business of making loans to participants and deposits for their clients that they should have a better understanding of the rate market just in general. I mean, the Fed has telegraphed here in the United States that we're going to have a prolonged tightening series of events, and we did so. We went from essentially zero to just over 5% in the last year or so.

And still, they hedged long duration on their books with their client money to get a yield, and in return, the rates continued to go up, and we know what happened. That was an unhedged position. So you would have to ask yourself, where is the risk management associated with some of these banks that are taking money from participants on deposit? Their fiduciaries, they should have a better understanding of the business that they're in. So I was quite surprised by that.

I don't like to see the banks continue to dwindle. We went from roughly 30,000 banks back in 1950 to less than 4,300 today.

So that's not a good trend for the financial sector. So I don't like to see that activity. So I would hope that they, people would continue to manage their risk in a smart way. And I'm not saying that from a self-interest proposal, most second and third tier banks because of some accounting rules can't even use futures, but they can use swaps. And I'd like to see them just use the swaps. I said in a meeting earlier today that I'm a big believer in the ecosystem because if the ecosystem continues to grow, then CME will do just fine in that ecosystem. So, you know, I'm a little surprised by some of this activity with the banks and it's frightening. The regular participants, listen, they're looking just to keep their money in a safe place. And when you lose the faith of the banks, it's a very troubling event. So the bigger ones get bigger, the smaller ones go away. In return, you could say that the consumers pay for that.