24-HOUR RISK MANAGEMENT
at the Pacific Rim Futures Conference,
San Francisco, California,
September 12, 1991.
1991 Conference on Global Risk Management was of particular
moment. It came at a time when markets had experienced momentous
changes in the economic/political landscape of the world. It
was thus appropriate and necessary to put these upheavals in
perspective, explain how and why they occurred, and establish
the role of technology in the process.
as a consequence of such analysis, can we begin to understand
the new world order we had entered and the indispensability
of futures markets in that world. Only by comprehending what
happened, can we adequately prepare for the coming demands
on our markets: the ability to swiftly institute complex risk
management strategies; the ability to utilize mechanisms that
offer 24-hour global capabilities; the ability to include managed
futures as a component of overall balanced portfolio management.
of us fortunate enough to be present at the latter end of the
Twentieth Century are privileged to have witnessed some of the
most monumental events of this era—events equal to any celebrated
milestones in the history of mankind. We were spectators at a
near-global insurrection that unshackled the chains of political
and economic systems; the very systems that threatened the sanctity
of world peace and enslaved a full third of the world population.
In a matter of years, we were eyewitnesses to the fall of the
Berlin Wall and the unification of Germany, to the beginning
of the end of apartheid, to the forceful rebuff of a Middle-East
tyrannical aggressor, to the liberation of nations imprisoned
for decades, to the end of the cold war, and as a finale, to
the absolute wretched demise of Communist rule in the Soviet
was the last act of this breathtaking drama that epitomized the
cataclysmic nature of the revolution that swept like wildfire
across the world. For Moscow represented the very epicenter of
the ideology whose doctrines caused the freedom of three generations
to be confiscated, economies of scores of nations to be disabled,
and the destiny of the entire planet misdirected for seven decades.
In three historic days, the inexorable forces of freedom crushed
the last pitiful attempt by blundering apparatchiks of
a past era—the State Committee for the State of Emergency—and
completed a revolution that will forever change world order and
the destiny of mankind. What a magnificent triumph of democracy
and freedom. What a glorious victory for capitalism and market-driven
economic order. What a majestic tribute to Thomas Jefferson,
Abraham Lincoln, Adam Smith and Milton Friedman. What a divine
time to be alive.
events that transpired are not the result of single influence
but rather the confluence of a multitude of factors. Nor did
the explosion we witnessed occur by virtue of a random spark.
The underground fire that ultimately overpowered the forces of
tyranny took years to foment. Clearly, the roots of the revolution
are to be found in the denial of fundamental human rights born
to everyone. Clearly, the central element in the failure of the
Communist ideology is the fact that a dictated economic order
is doomed from the outset. Clearly, the success of free world
market-driven economies became a standard impossible to ignore.
Clearly, there were human faces whose brave opposition to status
quo was indispensable to the process. The likes of Andrei
Sakharov, Mikhail Gorbachev, Lech Walesa, Vaclav Havel, Boris
Yeltsin, and, no doubt, countless others, deserve a substantial
measure of the credit.
was yet another human endeavor that played a pivotal role: the
technological revolution of the last two decades. Telecommunications
was without a doubt the quintessential component in the process.
It made it impossible to maintain dictatorial rule, it made it
hopeless to hide the unmitigated bankruptcy of State-ordained
economics, and it made it futile to resort to coup-d'etat of
by-gone eras. The would-be putschers forgot to take
out the fax lines.
the common denominator of recent world upheavals was simply modern
telecommunications capabilities. It fostered instant informational
flows in total disregard of internal prohibitions or national
boundaries. It offered a stark, uncompromising comparison of
political and economic systems. It gave the people of the world
the unprecedented ability to judge their government, compare
their economies, scrutinize their moral codes, examine their
individual freedoms, and weigh them against that of their neighbors.
Not only could governments no longer hide the truth from its
people, the people knew how to revolt—having learned it from
others on television.
once again was instrumental in dictating revolutionary change
in the political and economic landscape of our planet. Clearly,
its effects will be felt in every nook and cranny of civilization.
But just as clearly, the influence of the technological march
of recent years will be nowhere felt more than in world financial
of us in futures markets long ago read this message. It is no
accident that our markets represent one of the greatest growth
arenas of the last two decades. We recognized the march of technology
and understood its likely impact on world markets. Telecommunications
and technological advances fostered and will continue to foster
globalization, greater interdependence, instantaneous informational
flows, immediate recognition of financial risks and opportunities,
continuous access to markets of choice, more sophisticated techniques,
and intensified competition. These are the unalterable trends
of the future. As a consequence, the management of risk is at
the core of every prudent financial strategy—a reality that will
have the greatest impact on the global and 24-hour use and expansion
of futures and options markets. Indeed, if financial futures
and options were not yet in place, they would have to be invented.
and options are indispensable in a world that demands the ability
to swiftly institute complex strategies or to cost-effectively
adjust portfolio exposure between securities and cash. They are
ideally suited for a world where tailored risk management strategies
are on the increase and where opportunities rapidly appear and
disappear on a constantly changing financial horizon. They are
a vital option in a world in which it is often imperative to
utilize a credit-worthy mechanism that preserves credit lines.
They are without equal in providing a vast array of products
combined with an envious measure of liquidity and an incomparably
narrow bid/ask spread. They are the avant garde of market
innovation and soon, as a consequence of GLOBEX, will achieve
market coverage on a 24-hour basis. And most significantly, they
are well-positioned for a world where professional money management
is the wave of the future.
growth of institutional investment funds and the trend for managed
futures is as strong as it is unmistakable. Its momentum will
continue to accelerate because scientific and technological advancements
are forcing investors to continue to become highly specialized,
expertise-oriented, and professional. In turn, professional fund
managers will increasingly utilize our markets not only because
of competitive demands for higher returns, but also in response
to the need to diversify in an uncertain world.
the last decade, the money invested in managed futures accounts
grew from less than one billion dollars to nearly twenty billion
dollars. In the last several years, more and more public and
private pension funds are utilizing futures not only as a hedge
mechanism but as an asset class. In the last year, many financial
centers—including Japan and the Pacific Rim—began to adopt regulations
that will allow and foster the use of managed futures. Simultaneously,
the exchanges have applied for a variety of new contracts and
trading applications that are structured for the use of managed
funds. Indeed, GLOBEX is particularly designed to be attractive
to the fund manager. Simply stated, the markets of futures and
options again see the handwriting on the wall and are prepared
to embrace the opportunities that will emanate from the new world
lest we conclude that our world is in a relatively stable state,
its future secure, and its horizon bright, allow me to inject
a note of realism. Neither are financial futures and options
a panacea, nor is the new world order free from change or the
possibility of serious economic storms ahead.
Soviet Union is in chaos—to say the country is bankrupt is to
misconstrue the actual desperation of the situation. The Soviet
Union is among the least-developed and poorest countries in the
world, and its economy grows poorer every month. Even by the
official exchange rate of 32 Rubles to the U.S. dollar, an average
monthly Soviet salary is $15, and its GNP per capita about $100
last year. The Soviet national income declined by 12 percent
during the first half of 1991 and the fall is accelerating. According
to Newsweek, "a real slump of 20 percent seems likely
for 1991, presenting the world with the worst economic catastrophe
in Europe after World War II and surpassing the Great U.S. Depression."
problem may be generational. Seven decades of Leninist indoctrination
does not easily dissipate. To millions of Russians, Capitalism
remains a dirty word, a profit motive is immoral, there is no
work ethic, and a market economy is an unknown and distrusted
entity. To achieve a market economy, they would have to abandon
price controls, break up state monopolies, allow land ownership,
privatize industries and agriculture, grant people freedom of
movement, create a banking system, remove government controls
on business, open the economy to world trade, and make the Ruble
convertible, just to name a few. The reform process is estimated
to need between 15 to 30 billion dollars per year for the next
decade. It is bound to be a painfully slow process. Conditions
will get much worse before they get any better—there may be hunger
and even famine; there will be purges and continuous outbreaks
of civil unrest.
a backdrop of economic misery for 180 million people cannot bode
well for the rest of the world. Nor are the problems of the Soviet
Union confined to its borders. The economic repercussions caused
by the revolution will be felt worldwide. Independence for the
Baltic states will not automatically or easily translate to peaceful
coexistence or good economic times. The ramifications stemming
from the unification of Germany are still to be felt. The economic
and political woes of emerging East-European nations will continue
to be serious for many years to come. The implications for the
remainder of Europe cannot be underestimated, recessions in some
parts are already evident and can easily spread.
is the rest of world free from potential difficulties. China
sits like a giant time bomb. There are ample worrisome signals
from the American economy—our monumental public and private debt
is a critical weight on our ability to fully utilize our vast
economic engine, and our recession will continue to have negative
effects in the years ahead. Japan is in the 57th month of its
longest post-war continuous growth period. Will its prosperity
continue when some of its best customers are in recessions? Any
downturn in Japan coupled with a weakened American economy will
severely limit the financial capabilities of these two economic
super powers at a time when the world will desperately look for
American and Japanese financial assistance.
foregoing realities do not, however, diminish the magnitude of
the monumental events of recent history. The latter part of the
Twentieth Century was a breathtaking tribute to freedom and free
markets. Our world will never be the same. Still, realism requires
that we stay on guard. For we are all too well acquainted with
how quickly things can change. But that is the very point.
economic change, dislocations and uncertainty is what I suggest,
is that not exactly why you are at this conference? Is it not
uncertainty that gave rise to our markets in the first place?
Is it not uncertainty on which these markets thrive? In this
world, there seems to be no lack of it. Thus, whatever lies ahead—if
the future includes financial risk and commensurate rewards,
includes fast-paced changes that require instantaneous reactions,
or is anything like the past—the markets of futures and options
will continue to play a increasingly significant global 24-hour
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