Next we're going to have Terry Duffy and Patrick McHenry, our distinguished fellow here at the Pizarro Center, is going to moderate this. So Terry had a little problem. He was stuck at Chicago airport last night for many, many hours and then finally got back home. So he's going to join us on Zoom today. Terry, thank you so much for joining us and apologies for everything you had to go through last night.
So Terry Duffy and the CME Group, they have been tremendous supporters of the Pizarro Center, starting with Pizarro 1.0, and I'm just so, so grateful to you, Terry. You have spoken many, many times at our events at FMQ, and you know, Terry is just a legend in financial markets. He has led the CME Group for what, 20-plus years now. And I was really hoping you would be here in person. This is your last year and you're going to be retiring from the CME Group. But we are delighted that at least you're able to join us on Zoom.
Terry has overseen a lot. He has seen the transition from open outcry to electronic trading. He has engineered the mega merger between the Chicago Mercantile Exchange and the Chicago Board of Trade. He has negotiated the acquisition of the New York Mercantile Exchange. In 2021, Terry led a billion-dollar deal with Google. And then in 2025, he formed a partnership with FanDuel.
Terry, I am just so grateful to you for believing in us from the very beginning and supporting the Pizarro Center from the very beginning. And then we have another legend who's going to moderate the session, Patrick McHenry. Patrick, as I mentioned, is a distinguished fellow at the Pizarro Center. Patrick was the chair of House Financial Services where he did amazing work on stablecoins and just groundbreaking work on capital formation, AI, fintech, and I could go on and on. Please welcome Terry and Patrick.
Good morning. Dr. Aggarwal, thank you for the step, too. I appreciate it. In my size, you'll just see podium. And thank you for the warm introduction. Mike Pacer, thank you so much for you and your friends making this possible, this dialogue. Terry, you know, if I was the chair of the House Agriculture Committee, I think you'd be here in person. You're right. But we can blame air traffic control and the fiber optic cable cut in New Jersey for disrupting. It's always New York that's trying to mess with Chicago, right?
It doesn't change, Mr. Chairman. It just constantly goes on even in the travel woes.
Well, let me get on with it. I've got just a set of questions that I think you're well equipped to answer. But as Reena outlined, you began trading on the floor. That was your origin. And you began on the trading floor in a market defined by people and paper, physical proximity, loud voices. Today, CME operates a global electronic market that trades nearly every major category of risk. Before we get into the current controversies, can you give this audience the simple version? What does CME actually do and what economic problem does a futures market solve?
Well, first of all, Mr. Chairman, thank you very much. And again, I apologize for not being there with you and all the wonderful people at Georgetown. I've been doing it for many, many years, and I am saddened not to be there, but it was unavoidable. So, I apologize. Reena, thank you very much for having me. Again, I apologize for not being here. What does the CME do? So let me tell you how important the CME is in the derivatives industry as it relates to modern finance.
So everybody at Georgetown there will remember a professor by the name of Dr. Milton Friedman from the University of Chicago. I had the pleasure of sitting with Dr. Friedman when I was taking CME public back in '02, and Dr. Friedman looked at me and he said, "Terry, let me tell you how important futures contracts are to the fabric of the United States of America and the world. If we did not have them, we would need to invent them in order to move forward." And I found that a very profound statement by the late great Dr. Milton Friedman from the University of Chicago. He was very instrumental in doing work here at CME for many years. But I found that profound.
So what does CME do? CME is a neutral facilitator of risk management, listing products, policing products, so people and taxpayers can take on product without inherently having the producers and commercials take on more risk, which they inherently will pass off to the consumer. So when you look at our US debt, Mr. Chairman, for an example, we're at 40 trillion today. If we didn't have a futures market on the US sovereign debt, then people would not be able to aggressively buy that debt over the last 30, 50 years, and in return, the government would have to pay a higher interest rate, which would cost the taxpayers more money. That's just one example, and that goes through the food industry, the energy industry, all the other asset classes that CME trades and helps mitigate risk on.
Well, I think there's a lot of discussion about disruption in this marketplace. There's been this discussion as if this were new. But I am talking right now to one of the originators of disruption and an innovator. And CME is now one of the central institutions in global finance. But much of its history involved challenging established ways of trading through electronic execution, new contracts, smaller products, broader access. And once you become the incumbent, though, how do you preserve the instinct of a disruptor?
Well, I think what you do is you continually look, and something I've been very aggressive throughout my career, Mr. Chairman, is how do I create efficiencies? So I like to tell the story that I like to take a $5 bill and take a trade, leverage it up to $5, but only use a dollar to do it, but lower the risk to 75 cents. So how do you do that? Today, CME Group creates $96 billion a day of efficiencies for its clients through all the different programs we have, whether it's cross-margining with different entities or our portfolio margining within the institution.
And I also believe, since you are all in Washington there right now, one of the things I truly believe in is the growth of markets needs to come from the credibility of regulation. I was, you know, like you, sir, around in 2008, testified almost 30 times during the Dodd-Frank Act. And when you see bad behavior in financial services, you don't take one step back, you take about 20, and it takes a long time to rebuild. So I'm a big believer in credibility, which leads to innovation, which leads to new product, which leads to a better outcome of risk management for its participants, whether you use our products or not, they're important to your life.
And let me give you an example. If you're going to build a new hospital, a school, a prison, a sidewalk in a small town, you don't go knocking on doors asking everybody to give you money for their bonds. You go to Wall Street and you sell them. So you need an aggregator of people to do that to raise funds for these different entities. So it's a very important role that futures are using today in order to have progress move forward.
Well, CME reported a record average daily volume of 36 million contracts in the first quarter this year, and that's up 22% year-over-year. These records don't just happen. This is also about creating new contracts and new markets. But what is harder? Is it the idea of a useful contract or creating enough liquidity for it to become a market? How do you balance that? How have you created so many of these new products over your career and how have you made them real?
You know, that's a great question because as I've gone through my career over the last 30-plus years, 25 leading this institution, it seems like everywhere I go, Mr. Chairman, you'll hear someone suggest that they have a great new idea for you, but then they don't understand who's the natural buyer, who's the natural seller. And it's really important to understand that you have a commercial participant on both sides of the market, and then the speculators come in and participate thereafter.
So you have to figure out what you think the world needs tomorrow, today. And that's what I try to look at. So there's always new products out there that you can bring forward. It doesn't mean that they're the right product or a good product or the timing is right. Example being single stock futures. We listed those in 2000 under joint regulation with the SEC. They failed miserably, but we brought them back this year because I think the timing is right in order for people to participate, to have another tool for their risk management needs as they trade more individual bespoke products versus just indexes in general.
Okay. So you have to meet the market where it is, and sometimes you're too early. But you're constantly listening to your customers. Well, we just had a big panel, a really interesting panel, and a nice set of controversies around prediction markets. And you've said that some prediction markets provide useful information, while others, particularly some sports contracts, are simply gambling dressed up in the language of financial markets. Where exactly do you draw the line? What makes an event contract a legitimate risk management or price discovery instrument rather than a wager? Like, walk us through that thinking.
So I did catch a little bit of the end of the prior panel, Mr. Chairman, and I would agree with some, disagree with others, and probably disagree with the same ones and agree with the others as it relates to the prediction market business. But you know what's most important, Mr. Chairman, is there's core principle three of the Commodity Exchange Act, which means that you cannot list contracts that are susceptible to ready manipulation.
And one of the things that concerns me during this current administration, we have listed self-certification 2,500 contracts, and not one of them, not one of them, sir, has been stayed from being put forth to the public. And that's a concern to me because there's got to be a few that are not right. So one of the examples I like to use is I'd like to know what the Nathan's hot dog eating contest has to do with economics in the United States and who does it benefit other than Joey Chestnut. So that's a problem. But we have contracts on that.
We also have contracts on George Santos. Is he going to show up at the president's State of the Union address or not? And he gets to be the decider of that. And there's a contract listed on that. These are susceptible to manipulation. This is what sets the industry back. You know, I told people at a roundtable recently in Washington that we are not a bunch of carnival barkers in the financial services industry. It is critically important that this industry continues to grow forward.
So on sports, I will just give you my take on that. I had a relationship with FanDuel. They wanted me to list some products I was very uncomfortable with. So I would not list them because I think they're susceptible to manipulation. I do believe that sports are gambling and should be regulated by other states. I have said that for quite some time now, and I do believe that on some of these prediction markets there could be some benefits to them, but the way they're customized and structured, you got to go back to what I started this comment with: who's the natural buyer? Who's the natural seller?
So we're creating contracts for speculative use only, not for the producer, not for the wholesalers of the product who are involved in the business. So to me, that's really important that we first categorize products that are in the best interest of the American people and the producers that have produced the product and the commercials who sell them to us. So we're creating too many products that are designed around speculation.
So you, as I said, you've, you and your career, you've been throughout your career a serious disruptor, right? You've brought real innovation to these markets. And I think that's what you're hailed for, what you have produced for Chicago, which you've protected about this model that was centered in Chicago, remains centered in Chicago. And so you've always been an innovator. You've always been an innovator. Even today, you're bringing on new contracts, and you have ambitions for the future for CME. And though you're stepping back next year, you still have as much fire, and I think if you were here in person, I think people would see even more of your fire. In fact, you would have been a lot of fun in the middle of the prediction markets panel.
I would have jumped on stage, Mr. Chairman, uninvited.
Well, there's a reason why we separated you because... So let me ask a question, a pointed question about that. What do you admire about those prediction markets, Kalshi, Polymarket, let's just call it prediction markets? What do you admire about those new entrants? What do you think they got right? You certainly outlined what they've gotten wrong, but what do you think they've gotten right? What do they understand? Something in the market that is something real. Think of that. It's a question of one innovator to another.
Well, Mr. Chairman, I would say that it's kind of early in the innings of the prediction markets to say what they got right. It's easy to point out what they got wrong because they're in violation of core principle three. So we'll take that off the table, some of the mentioned markets that some of the prior panel mentioned, things like that. But maybe what they've gotten right to date is the appetite for people to be in charge of their own destiny.
And when I say in charge of your own destiny, people want access to the marketplace, especially the younger people. And I admire that because I think that's good for finance. Well, right now they're used to getting on their phones, pulling up an app, and having access instantaneously. And I think that's what the prediction markets probably have gotten right. They have come into a situation where they have fulfilled something that has been a void for the younger participants who went from gaming to trading, and now they want that access. So I think they've gotten that right.
The question is, you know, are all these products suitable for the long run, or are we just going to load up with a bunch of products and then people, you know, get hurt along the way without the proper education associated with them? So I'm a marathon guy. I'm not a sprinter. But I like to argue a little bit, as you know. I still think that they've gotten certain things right, but I would like to see them put more effort into it as it relates to some of these products.
Okay. So appetite, the retail appetite, is some key piece of signal here that you see. And so let's move on to perpetuals. The CME is suing the CFTC over treatment of perpetual futures, and at the same time you've said CME knows how to construct these products and could list them if customers demanded them. So let me put the question directly: Is your objection to perpetuals themselves, to the way the CFTC approved them, or to competitors being allowed to offer economically similar products under different regulatory rules?
Yeah, kind of all the above. And Mr. Chairman, you were there, you know this. Under Dodd-Frank, when Dodd-Frank came forward, they defined what a swap is and what a future is. And as you may or may not know, the audience may or may not know, with perpetuals, there's what's called a funding rate in order to keep the market tied to spot. And that funding rate is a payment between two participants. And anytime you have a payment between two participants, that defines the contract as a swap. So I'm very concerned that there's some ambiguity in the law that the CFTC did not follow.
As you also know, the Chevron Act was overturned by Loper Bright, and the regulators cannot run roughshod over the legislative process. And I think they have done that because it clearly defines what a swap is in the 2010 Dodd-Frank. So our suit is based upon let's give clarity to the road. I hate to put customers into a contract that is deemed a swap. They're treating it as a future. As you also know, there's contracts and futures that get 1256 treatment on taxes, which is 60 long-term, 40 short-term gains versus swaps, which are ordinary. So there's a different tax regime.
In swaps, you also have to register to be a swap participant. Also, in swaps, there's a five-day margin. Futures is one day, as you know. So there's a lot of different things. I don't want people not to be in compliance thinking they are, and then the government comes back and says, "By the way, you have a tax liability or you are in violation of the law." We've seen how governments can act, you know, after the fact. And they could say, "Well, geez, the CFTC passed this." Well, okay, they passed it, but they did a 40.3 filing on the passing of the perpetual Bitcoin contract. 40.3 means it could be a full review up to 45 days.
In their comments, Mr. Chairman, they put in there that was a novel and complex product. Not my language, theirs. They didn't give the industry the ability to participate, to comment on this. They approved it in less time than a 40.2 filing, which is self-certification. I thought that was wrong. I thought they ran roughshod over the process. And I think it's important for users to know exactly what product they are trading under what regulatory regime. And I think there's a lot of confusion here. So that is a purpose of it.
And when I said that I could list them, it's not exactly rocket science what you would do with perpetuals. But what you basically do is eliminate the expiration. But when you eliminate the expiration, Mr. Chairman, you take away all the commercials' ability to hedge because most of those hedges are dependent upon a date to be at a future certain time, and there's loans associated with them and everything else. So in commodity products alone, as you know, those products get consumed or disposed of. So those are not perpetual in nature. Treasuries have different durations associated; they're not perpetual in nature. So there's all these different things that are not usable by the participants. Oil is another great product. So that does not fit into the perpetual world.
94% of CME's business is institutionally driven. So my clients don't have an appetite or don't have a use case for how they're going to hedge this product when it's only a one-month contract. And what is also really important, which no one's talking about, Mr. Chairman, is that most trading in derivatives, whether it's retail or commercial, they buy one month and sell the next. In perpetuals, there's only one month or one contract. You can't do that. 50% of the trade today is done that way.
Risk management. It's kind of hard to say what's going to happen from one moment to the other. So you might, example being, buying a June contract long and selling a July contract short, and then you decide how you're going to leg out of that position depending on what the fundamentals are. So a lot of these contracts just don't work. It doesn't mean I don't have the ability to list them because again, this is not exactly rocket science or innovation how they listed them.
Well, I understand you're retiring, but I think everybody here realizes you've not lost a step. It is not without understanding of detail. And for the crowd and for those that are Georgetown students, what Mr. Duffy just outlined was a series of roughly a dozen tax bills over the last 100 years in his answer. He's mentioned no fewer than probably 20, no fewer than 20 pieces of legislation Congress has passed over this time defining these markets, refining these markets, and I don't know how many pieces of separate regulation you've outlined.
So in this one answer, you've touched on a hundred years of financial regulation and the development of these markets. So when you think that you can master something, I think even what Mr. Duffy has shown today is that we are all still students of this process. I want to finish with, you know, there are two very interesting, I think two fascinating innovations: 24/7 trading, and then specifically your compute futures that CME has created this market for, computer... well, I'll let you describe it.
So if you could touch on perhaps 24/7 trading and compute futures, and then I'd love to get to questions for our students. If you'd wish to line up, we'll go to questions after Mr. Duffy answers this question.
