Here are some highlights from the opening session at FIA Chicago, the Futures Exchange leaders panel.? The panelists were:
- Phupinder Gill, Chief Executive Officer, CME Group
- Finbarr Hutcheson, Executive Vice President Global OTC Services, NYSE Euronext
- ?Andreas Preuss, Chief Executive Officer, Eurex
- Jeffrey Sprecher, Chairman & Chief Executive Officer, IntercontinentalExchange
The first question was about the biggest news of the week: Hurricane Sandy.? This is the first time that the exchanges have shut down due to weather-related issues since 1888.? There were varying opinions on whether this was the right thing to do.? The exchange leaders were asked to weigh in on that.
Gill: Much like when the exchanges closed because of 9/11, it showed the resilience of the industry.? Even more so than then, everyone seemed much more prepared. He grades the industry response very high.
How did the U.S. market shut down affect the European markets?
Preuss:? The impact was very clearly noticeable, slightly stronger than a public holiday in the U.S. in terms of volume reduction. Was the decision right or wrong?? The protection of lives should always have preference over having markets function.
Hutcheson.? The decisions to close down were made based on safety of employees of exchanges, which was the right thing to do.
Managed futures as an asset class have grown considerably since 2008, which created the need to educate investors on the safety and transparency of the marketplace.? Then we had the MF Global and PFG issues.? How do we attract small investors when there are still such issues?
Gill.? Traits of industry still hold true; FCMs are not going to take funds from customers.? PFG was pure fraud, but MF Global was a little different.? The timing of those events was very bad. ?The question is, what are the holes and how can we fix them? ?This is an industry issue, not an FCM or an exchange issue.
Sprecher. There has been tremendous growth in a short period of time, so we have seen investors increasingly look for other asset classes.? I think we?ve seen a rapidly growing industry that has not kept up with the volume of interest that has been coming in, but it?s coming together.? There is still work to do, and there will always be work to do, but the infrastructure is catching up.
What are your views on the challenge to the preservation of the FCM pricing model?
Hutcheson:? That source of revenue is not entirely transparent. The pricing construct of FCMs is going to have to change.? There is a lot of pressure to move towards transparency, and the end result is that investors will prefer that.
Swaps clearing and trading are on the upswing.? How will the swaps market develop, especially in regard to the ICE and CME converting their energy swaps into futures contracts?
Sprecher: Drivers in energy commodity space have been, long-term, a move to have those contracts more standardized, so it has been the natural evolution of those contracts. Next logical step was futurization of those contracts.? Dodd-Frank was final catalyst in the move of those contracts.
Gill: Where the energy markets converged was, in a simple word, was efficiency.? From the NYMEX point of view, Enron was a catalyst, as we needed to provide safety.
Is this a trend that may work in the European swap markets?
Preuss: ?It?s a little early for us to come up with projections of how quickly the market will evolve in this space.? We are constantly reviewing and assessing the developments, and it?s well known that we?ve had our excursion to move towards futurization, albeit a different asset class. In 2007, and we did prove to ourselves that, in theory, it makes sense, but in reality, was premature. It was considered to be too threatening to the dominating part of sell side banks businesses (OTC trading), and the fact that it was welcome by other organizations did not matter.?
What is your view on the drivers of the decline in exchange volume?
Sprecher: I?m bullish on the industry, as things become more standardized/transparent/electronic. Those trends are at the forefront and are to the benefit of market providers, long-term trends for all of us are amazingly healthy.? As markets become more regulated, the barriers to entry for entrepreneurs increase.
Preuss: ?I think that a year ago, if this question had been asked about a decline in volume, the answer would have been that it was the result of cyclical elements as opposed to structural issues. I?m pretty convinced that today, it?s a more balanced reaction.? My view is that we are going to see the factors required to see a cyclical downturn into an upswing reignite towards 2013/4, and only then will we all realize the extent to which the negative volume that is because of structural changes, regulator changes, and a natural evolution.? We are all well advised to assume that these are contributing to the volume depression that we currently have, and we are going to compensate for this. OTC clearing will be a relevant, if not a significant contributor to revenue enhancing.? Diversification of asset classes traded will help.? We are all going to see a further evolution of our own market models, which could complement all market models.
Hutcheson: ?The industry is very positive, but there are a number of factors affecting some of the markets.? A raise in interest rates would help significantly.? I don?t know that we?ll get back to the 2001-2007 environment, which was a perfect storm of benevolent environmental factors, and we?re not going to get that anytime soon.? That being said, I still see significant growth.
Gill: ??As exchange heads, we are always very optimistic about the long term, so we make those predictions very easily. But, if you look at what has evolved in light of the combination of cyclical and environmental factors, the generally accepted viewpoint is that things will slow down in the short term.?
Regarding electronic markets and the potential abuses in them, do you think they should be easy to detect? Or, do we either not hear about the abuses or they’re rare?
Gill: They’re not detected because they’re harder to do so. But more importantly, abuses shouldn’t take place. What is important, is market integrity.
Hutcheson: They’re harder to detect across the different exchanges. Part of this is from the fragmented markets.?
Preuss: We have regulatory staff that is constantly monitoring these markets; they’re housed in the exchange and keep an eye on the online trading. The regulators are embedded. It is important to be equipped with the technology and resources to monitor this.
Who do you think will win the election and how will this affect the markets?
Sprecher: Our exchange is bi-partisan and I’ll say the the market will rally in response to the winner.
Preuss: Uh, no answer.
Hutcheson: It will be a close election.
Gill: I am a foreigner answering this question but I would say I am fiscally a Republican and socially a democratic.
What do you think of Dodd-Frank and how much of it did you read?
Sprecher: It wasn’t a collaborative effort. Dodd-Frank shaped the market’s reaction. Yes, I did read it.
Preuss: It’s a lengthy document, like 2,000 pages. The question is how will it be administered and applied?
Hutcheson: Dodd-Frank will reform the market. It will be challenging.
Gill: I think they rushed the draft document. It includes complex and complicated issues. The industry is working hard to be collaborative.?