US treasuries clearing affair: more bad news for Britain?

Key Markets update for Tuesday, 21 January 2025

The extremely murky story, which I wrote about on Friday, may have a fairly mundane explanation tied to the catastrophic fiscal position of Great Britain. Please bear with me: in last week's report, I mentioned the exchange between Senator John Cornyn and Treasury secretary nominee Scott Bessent. During the latter's confirmation hearings, Cornyn mentioned the "proposal for an entity to clear U.S. treasury futures at the London clearing house which is overseen by the Bank of England."

A transfer without precedent

As Bloomberg put it, it all boils down to whether the U.S. should allow Treasury futures to be cleared abroad. This would be a move without precedent: it has never been done either by the U.S. or any other sovereign nation. Nevertheless, Howard Lutnick, the CEO of Cantor Fitzgerald, one of the 24 U.S. primary dealers authorized to trade US government securities with the New York Fed, embarked on a project to bring the trading of U.S. Treasury futures to FMX, a new futures exchange, in competition with Chicago Mercantile Exchange - the CME Group Ltd. FMX partnered with LCH Limited in London, which was going to serve as the clearing agent for FMX. To spearhead the plan, Lutnick lined up the support of several major U.S. banks.

No, it’s not just a technicality nor an ordinary business venture

The whole arrangement may seem harmless - a mere technicality within a project that's being pursued as a legitimate competitive business venture. However, the potential implications of the arrangement remain obscure. There's a view that if the clearinghouse is not regulated by the U.S. the clearing process would not be under U.S. sovereign control in the event of a crisis. It is interesting that this whole initiative gathered momentum at the same time as the Fed Chairman Jerome Powell decoupled the price of U.S. money from the London Interbank Offer Rate (LIBOR) and set it to U.S. controlled SOFR (Secured Overnight Financing Rate).

Whatever the case may be, on 21 August 2024, Senator Dick Durbin wrote a letter to Rostin Behnam, chairman of the CFTC, asking him to “consider any potential risk to US regulators not having full authority over a clearing house in a foreign jurisdiction that is clearing US Treasury futures.” Durbin also wanted to know about the potential impact “on the stability of our sovereign debt.”

But nearly three months later, Behnam still had no answers to offer to Durbin. He said that, “we are still working with Treasury on the issues around like, what risks potentially offshore clearing of US Treasury futures plays, but haven’t come to any decisive conclusion. We’ll get back to the Senator.” Really? No answers after three months' time? It's almost like someone has something to hide.

Is it all just a big money grab?

But the Bloomberg article that conveyed Behnam's statement also revealed that new rules are "being worked on," which "would allow futures brokers and derivatives clearinghouses to invest customer margin in foreign sovereign debt of Canada, France, Germany, Japan and the UK." In other words: the margin posted by the investors to trade the futures of the world's single largest market, could be invested by the exchange clearinghouse in sovereign debt of a specified group of countries, including the UK.

That clearinghouse, LCH, is controlled by the Bank of England, which is sitting on losses of at least £150 billion. At the same time, the British government is itself in dire straits and desperate for foreign investments to fund their profligate budget. And the brokerage involved in the whole deal is none other than BGC, the spinoff of Howard Lutnick's Cantor Fitzgerald.

The bizarre aspect of this story is that Lutnick is regarded as Donald Trump's main ally on Wall Street whom Trump included in his transition team. Let's see how the situation develops, but it does appear that the gambit is running into stiff opposition, so the investment cavalry for the UK government might not be coming through after all. All they'll be left with is the money printing press.

Yes, Britain is now collapsing

This further reinforces my “fall of Britain” hypothesis, which is why this newsletter includes trading signals for British sovereign debt, FTSE 100 and the British pound. I think there will be interesting developments on that front. The first and second part elaborating the hypothesis are linked below:

Part 1: The coming collapse of Britain

Part 2: The fall of Britain

I’ve been writing about this since August 2021 but of late, it seems that the markets are beginning to smell blood:

Britain could be facing an unravelling at the scale of the Weimar Republic in 1921. So far as the degenerated oligarchic imperial establishment goes, good riddance.

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Trading signals for Key Markets, 21 Jan. 2025

Due to market closure in the US yesterday, we only have one new signal today:

After this change, your exposure should be as follows:

There’s no attachment with today’s report.

Best regards,

Alex Krainer