Honoring Financial Innovation
CME FRED ARDITTI INNOVATION AWARD :
Creative Ideas in Financial Services
Leo Melamed ~ Chairman Emeritus, CME


History has noted many individuals for whom innovation and freedom
of thought were paramount. The great physicist/astronomer Galileo
once said, “All truths are easy to understand once they are discovered;
the point is to discover them.”
Move forward from the times of Galileo to today’s world of financial
futures and CME Chairman Emeritus Leo Melamed, who is known not
in the traditional tomes where Galileo takes up page after page,
but rather in the world of finance where he is recognized as the
“father of financial futures.” As a leading light in helping to
create innovative, globally significant financial concepts-turned-real
that many said could never make it off the back of a napkin, Melamed
shines. In 1986, the late Nobel economist, Merton Miller, called
the launch of financial futures “the most significant financial
innovation of the last 20 years.”
Groundbreaking thinking that today has made effective, efficient
global risk management through the use of futures products is that
for which Leo Melamed is being honored as this year’s recipient
of the CME Fred Arditti Innovation Award presented by the CME’s
Center for Innovation. Established in 2003, the Center identifies,
showcases and fosters examples of significant innovation and creative
thinking. The award annually honors an individual or group whose
innovative ideas, product or services have created significant
change to markets, commerce and trade. The recipient is selected
by CME’s Competitive Markets Advisory Council, which includes three
Nobel Prize winners among its ranks. Last year’s Arditti Innovation
Award recipient was Nobel Laureate in Economics William F. Sharpe.
The award, to be presented in Chicago on April 20, is named after
CME’s former chief economist, Fred Arditti, well-known financial
services innovator who led the development of CME’s Eurodollar
futures contract, now the most actively traded futures contract
in the world.
Today’s derivatives arena, and undeniably the futures markets,
are a vital force in the U.S. as well as in the world economy.
They are but a distant relation to the commodity futures of the
1960s when they were considered by many to be more of a novelty
than a necessity and were populated in trading pits for grains,
eggs, potatoes and pork bellies.
At the forefront of three milestones – the transformation of futures
from agriculture to finance; the replacement of physical delivery
with cash settlement for futures trade; and the “wiring” of futures
and options for global electronic trading – Melamed perhaps is
known best for recognizing and capitalizing on the opportunities
stemming from the impending 1971 collapse of the Bretton Woods
fixed exchange rate agreement, signaling the globalization of markets.
Embracing free-market economist Milton Friedman’s ideals that
fixed exchange rates ran counter to free market philosophies, Melamed
saw opportunity and allowed his trader's instinct to lead him to
what might be possible. He approached Friedman about writing a
feasibility paper about the need for a futures market in currencies.
Melamed used that paper to gain support from then-Fed Chairman
Arthur Burns and U.S. Treasury Secretary George Schultz, and to
blaze the trail for the creation of the International Monetary
Market (IMM) of CME, the first futures exchange expressly engendered
for trading of financial markets - beginning with seven foreign
currency contracts. In the first decade of IMM’s existence, under
Melamed’s leadership, CME captured the three primary sectors of
finance for futures trade – foreign currencies, short-term interest
rates and equities.
The financial revolution that had begun with currencies quickly
extended to interest rates and fostered the idea of cash versus
physical settlement for ensuing financial products, initially with
Eurodollar futures. In the early ’80s, cash settlement became CME’s
gateway to index products, most notably on equity index futures,
for which the exchange quickly became the unparalleled industry
leader. Today it further enables trading even in non-traditional
instruments that help manage risk in such areas as inflation and
weather.
No longer would futures exchanges be the same. Futures on financial
instruments, and later, options on those futures, made their way
to the trading desks of risk-averse institutions that once had
dismissed futures out of hand. Financial futures inaugurated the
era of financial derivatives, accelerated the movement toward financial
engineering and over-the-counter (OTC) products, and spawned financial
futures exchanges in every corner of the globe. Today, futures
markets are used to hedge and manage risk by international and
domestic banks, public and private pension funds, mutual funds,
hedge funds, asset and liability managers, swap dealers, insurance,
mortgage and energy companies.
As technology boomed, making the financial world an ever-more-interdependent
arena, new seeds of innovation in the futures world were taking
root. In 1987, Melamed championed breaking the tradition of open
outcry by conceptualizing the first electronic system for futures
trading. Just five years later, CME launched Globex®, an electronic
trading platform that would put an exclamation point on the fact
that the days of isolated markets responding only to local economic
events had passed.
The specter of what electronic trading might mean to more traditional
futures trading was not necessarily a popular choice, but underscored
by the philosophy that ‘he who rejects change is the architect
of decay,’ this innovation today has proven to be the principal
growth engine for CME – one that has propelled it to the position
of the largest and most diverse financial exchange in the world.
In 2005, CME Globex volume represented 70 percent of CME's one-billion-plus
contract volume.
In sum, Leo Melamed’s contributions to markets, commerce and trade
over the past 35 years have been extraordinary and unique. Techniques
for financial risk management would look dramatically different
today had he not been an innovator with a trader’s penchant for
taking risks on ideas that would change the world.
For more information about the CME Center for Innovation, please
visit www.cme.com.
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