at the World Financial Futures Conference,
September 14-15, 1982.
creation of the London International Financial Futures Exchange
(LIFFE)—aside from offering an endless possibility of puns—was
an enormous compliment to the concept of financial futures
and a valuable boost to its short history. Indeed, many of
us in the U.S. futures industry encouraged the process in Great
Britain and gave our time, advice, and assistance to the Bank
of England and the organizers of this endeavor—principally
it was no accident that LIFFE was modeled after the IMM. In
fact, Barkshire and I—who became good friends—both believed
in the possibility that one day there would be a system of
mutual offset between our two exchanges similar to the system
the IMM was working toward with the SIMEX. While this did not
materialize, we nevertheless recognized the value of new financial
futures markets around the globe: that they would validate
the concept, spread the gospel, and in turn create users and
uses for all futures markets.
opening of the London International Financial Futures Exchange
(LIFFE) underscores the internationalization of financial futures
markets. It embodies a dual achievement: the realization of a
dream for this center of finance and a clear signal that the
idea of financial futures—born in Chicago—responds to a global
necessity. The stage is now set in London. For those who labored
these past years, the creative process is over; the many hours,
the frustrations, the plans, negotiations, and the myriad of
problems are now behind you. The one critical question remaining
is whether LIFFE will succeed.
financial futures community in Chicago shares your pride and
your excitement. We are acutely aware of the difficult process
you have just completed, and we understand your anxieties only
too well. After all, it was just ten years ago that we at the
Chicago Mercantile Exchange (CME) suffered similar formative
pains in our creation of the International Monetary Market (IMM)—a
move destined to vault a group of pork belly and cattle traders
into the center of the world finance and an effort that resulted
in revolutionizing our industry.
one major respect the work of LIFFE creators was much simpler
than ours. At the birth of the IMM and the conceptual introduction
of financial futures, it was necessary first to convince the
world financial community that financial futures are a necessary
adjunct in the management of risk. It took years of late nights
and early mornings, an incalculable amount of traveling, unceasing
gospel spreading, arm twisting and ear bending. LIFFE has a much
easier task before it than did the IMM a decade ago. Financial
futures are now an accepted fact of life on our shore and undoubtedly
the realistic appraisal here as well. That will not guarantee
your success but at least it will make your work easier since
you do not have justify your existence.
world entered the 1980s after enduring a decade of financial
turmoil never before experienced. Inflation, energy costs, changing
values between currencies, volatile interest rate movements and
extreme swings of commodity prices combined to create a business
climate fraught with danger and one demanding new programs and
mechanisms for the management of risk. It represented the emergence
of a new economic order, one bound to stay with us for the foreseeable
future and one for which financial futures are ideally suited.
Indeed, if we had not already done so, we would need to invent
financial futures all over again.
however, cannot be assured simply because the idea is right.
Success is the result of hard work. We hope to be here ten years
from now to share with you the pride of equal success.
me to offer a brief historical sketch of the growth of our Chicago
markets these past ten years in order to suggest a goal for your
market. During that decade, the IMM set the industry standard
for growth in volume and contract diversity. The autumn of 1982
has not yet even fully arrived and already it is clear that financial
futures volume at the CME will smash all previous annual records.
In the first eight months of this year, IMM financial futures
volume totalled 12.6 million contracts, a 40% increase over the
same period in 1981 and just 2 million contracts shy of the record-breaking
far this year, nearly 6 million contracts have traded in our
short-term interest rate futures complex of Treasury bills, Certificates
of Deposit (CD), and Eurodollars, while currency futures topped
5.7 million contracts. In both cases, volume is almost two-thirds
above the 1981 pace. And figures show our new contracts performing
even better. The S&P 500 stock index futures contract pierced
the one million contract level in August, after just four months
of trading. It is a statistic of such wonderment that it is difficult
for us who experienced it to believe it. Additionally, in May,
just ten months after opening, the Certificates of Deposit futures
contract likewise topped one million contracts. These are the
first two contracts in the history of the Chicago Mercantile
Exchange to trade one million contracts in less than four years
in 1982, yearly volume records have been broken in the Canadian
dollar, Japanese yen and Swiss franc futures. Swiss francs, our
second most active contract in August with a record monthly volume
of more than 313,000 contracts, has traded nearly 1.8 million
contracts on the IMM so far this year. These transaction statistics
in a wide array of futures instruments have justifiably propelled
the IMM to its place as the number one financial futures market
in the world.
a direct consequence of this success, there has been a meteoric
rise in exchange membership prices over the years. IMM seats
were originally sold to the public for $10,000, of late it has
taken well over $250,000 to purchase this membership. And the
IMM growth helped to push the full CME seats to a high of $380,000—the
highest seat price ever attained on any futures exchange. The
high membership values and the willingness of individuals and
institutions to pay the price for them is strong evidence of
the widespread confidence in the stability, integrity and future
of the International Monetary Market.
overriding strategy that has been central to our success has
been the effort to diversify the exchange. Calculated and exhaustive
research efforts have preceded each new contract introduction.
At each juncture we sought to balance user demand for diverse
and sophisticated contracts on the one hand with the necessity
for liquid markets and manageable overall exchange operations
on the other. The IMM has consistently attempted to strike a
correct balance between those who implored for more and more
futures instruments and those who cautioned we not over-extend
our capabilities. Indeed, those capabilities were stretched to
the limit recently when, in just ten months, we introduced an
unprecedented series of new financial futures contracts: the
90-day domestic Certificate of Deposit—the first futures contract
based on private short-term debt instruments—introduced July,
1981; the 90-day Eurodollar time deposit contract—which, in my
opinion has the potential of becoming the most successful futures
instrument ever devised—introduced December, 1981; and the revolutionary
S&P 500 Stock Index contract—which we believe will become
the bellwether for equity futures—introduced April, 1982. That
all these contracts have proved successful is something of a
is incumbent to underscore that the opening of the Eurodollar
futures contract represents an important milestone in the history
of futures. This contract initiates the revolutionary concept
of cash settlement, a dramatic departure from the age-old physical
delivery procedure of futures markets. Cash settlement paved
the way for the S&P 500 stock index futures contract as well
as for other potential futures concepts and instruments never
before thought feasible.
predominant consideration at the CME in the development of new
contracts is floor liquidity. Liquidity demands that we have
on hand a pool of skilled, professional traders and brokers.
This subject was and continues to be of similar concern to the
organizers of LIFFE. To this end, we pioneered a divisional concept
at the CME. The creation of the IMM division a decade ago served
to infuse our institution with new members. We have since applied
similar programs to achieve similar results. During the last
year, the CME adopted two separate plans to expand the trading
floor population. The first was the Membership Rights program
which expanded the number of floor brokers and traders by 25%
while maintaining the value of existing memberships. At the close
of 1981, we again unveiled the creation of a new division—the
Index and Options Market (IOM). The IOM division is designed
to provide a marketplace for contracts based on indices and options
on futures contracts. We anticipate over 1200 members to become
floor participants of this new market.
diversity and growth at the IMM is only half the story. Of even
greater importance has been the resulting elevation of our markets
and market professionals to a position of integrity and credibility.
Initially when we proposed the idea of futures contracts based
on money, many New York bankers laughed at us. Yet these same
bankers are now vying for spots on Chicago's trading floors.
Some have even applied for and received approval to become futures
commissions merchants (FCMs) so that they can act on behalf of
clients in futures contracts of currencies, interest rates and
stock indexes. These include such respected financial institutions
as Morgan Guaranty Trust, Continental Illinois National Bank,
Bankers Trust, First National Bank of Chicago, the Republic National
Bank of New York, and others are waiting in the wings. This is
compelling evidence of our raised stature in most traditional
investment circles. It is a trend that has spread to Europe and
is very visible here where banks from around the world intend
to maintain operations at LIFFE.
has become evident to banks and other financial institutions
is that financial futures are an essential risk management tool
and that their presence on the trading floor is a necessary adjunct
to their business. This consequence was achieved because the
futures industry has been successful in responding to the needs
of the business world. Indeed, the IMM has become very skilled
at pinpointing the specific market requirements and developing
contracts to meet those needs.
IMM Treasury bill futures contract and the Chicago Board of Trade's
Treasury bond futures contract are excellent examples of responding
to a market demand. These contracts have more than lived up to
their roles as hedging and price discovery mechanisms and have
become integral parts of the immense U.S. government securities
market. Indeed, the hedging and price discovery aspects of the
Treasury bond and bill futures permanently altered the old fashioned
negative view about futures markets that many held. Similarly,
the introduction of stock index futures is already changing the
trading habits and techniques of those involved with the stock
CME is not the only exchange introducing successful new contracts.
Early in May, the Chicago Board of Trade began trading a 10-year
Treasury note contract which was heralded in with the largest
ever first day volume—33,502 contracts. Though volume has been
at lower levels on a day-to-day basis since then, open interest
has grown as participation in this important intermediate range
interest rate contract broadens.
is ample evidence of the increased professionalism and sophistication
of financial futures industry outside the exchanges. Major American
universities—Columbia University in New York, Chicago's Loyola
University, and the University of Illinois—have established institutes
for the academic study of futures markets. In addition, a pool
of talented legal experts specializing in futures has emerged
as well as a law bulletin and an academic journal discussing
current issues of importance in the expanding futures industry.
But the best example of the professionalism that now surrounds
the futures industry is the emergence of an industry-sponsored
organization designed to ensure the industry's strength and integrity—the
National Futures Association (NFA). I am proud to have played
a role in the long and arduous birth of the NFA, an organization
which holds the key to the continued growth of the futures industry
in the United States.
sanctioned and authorized by the Commodity Futures Trading Commission,
the NFA is designed to play many regulatory roles: it will audit
the financial condition of FCMs outside the purview of exchange
surveillance; it will regulate sales practices of futures firms;
it will arbitrate disputes between customers and FCMs; it will
eliminate regulatory duplication between government and exchanges
regulatory programs; and it will lessen the cost of federal regulation
of the futures industry by self-funding itself. NFA membership
will be drawn from all sectors of the industry: exchanges, FCMs,
commodity trading advisors, pool operators, and banks. Consequently,
the NFA will become a national unifying body and the industry's
traditional lines and barriers that so clearly defined the U.S.
financial services industry in the past are becoming blurred; i.e..
the separation between banking and brokerage firms, S&Ls
competing with banks for funds; banks pressuring to compete on
a more level playing field with other financial institutions;
the weakening of demarcations of the Glass-Steagall Act that
have guided the U.S. over much of the Twentieth Century; and
mergers of such diverse organizations as Sears Roebuck with Dean
Witter Reynolds, Prudential Insurance with Bache, and American
Express with Shearson reflect these deep-rooted alterations in
the fabric of the financial services world.
IMM, from its inception, recognized that the financial futures
concept was of a global nature and thus in January 1980 opened
an IMM office here in London—the first of its kind by an American
exchange. The London office proved to be most instrumental in
the education process for our markets. We are now taking direct
steps at the possibility of developing a market link with the
Singapore International Monetary Exchange (SIMEX).
is the IMM's record of its first ten years. Impressive, I hope
you will agree—and a goal for LIFFE. Most important: today's
global environment makes LIFFE's creation highly appropriate.
Your success will be beneficial to us and all markets. It will
foster growth, better understanding, more participants and deeper
breadth for all futures markets. We wish you success and offer
our continuing assistance. Our purpose is common.
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
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