AND THE ASIAN MARKET
Seoul, South Korea
December 15, 1994
Effects of the Telecommunications Revolution
their book, Free to Choose, the authors, Nobel Laureate
Milton Friedman and his wife Rose, assert that the success of
the United States is the combined consequence of two basic ideals:
economic freedom coupled with political freedom.
can be no doubt about the wisdom of this truth. Indeed, in recent
years the world experienced first-hand the incredible might of
these two ideals as together they propelled the disintegration
of world Communism and the collapse of the Soviet empire. Clearly,
the economic freedom precepts of Adam Smith, when combined with
the principles of political freedom espoused by Thomas Jefferson,
were fundamental to the unmitigated triumph of market-driven
economic order over central planning, of Capitalism over Communism,
of democracy over dictatorship.
there is more to this story. There was yet another dimension
to the revolution that began in the last decade and spread like
wildfire across most of the world: the inexorable march of science
and technology. Indeed, the common denominator of all recent
world upheavals—the unification of Germany, the liberalization
of Eastern Europe, the fall of Communism, the collapse of the
Soviet Union, the dissolution of apartheid—has simply been modern
global communications capabilities.
than any other single factor, the telecommunications revolution
offered a stark, uncompromising comparison of political and economic
systems. It made it impossible to hide the unmitigated bankruptcy
of the Communist order or continue the unconscionable enslavement
of people. It provided people with the unprecedented ability
to judge their government, compare their living standards, evaluate
their individual rights, examine their freedoms, and weigh them
against that of their neighbors. The truth could no longer be
concealed from the people.
Globalization of Markets
technology, as it has throughout the history of man, has dictated
once again the fundamental and revolutionary change in our social
structure and reshaped both the political and economic landscape
of our planet. Its consequences reverberate through every facet
of civilization and influence every aspect of daily life. Although
it is impossible to completely perceive the ultimate consequences
of this technological march around us, we know with certainty
that its influence to date has been felt nowhere more than in
financial markets. The results have been global, spectacular,
and absolute. Our separate financial existence has been transformed
into one inter-related, inter-dependent world economy. Distinct
business divisions based on time zones have vanished. Geographical
borders that once could limit the flow of capital are history.
Internal national mechanisms that once could insulate a population
from external price influences are increasingly impotent. NAFTA
and GATT epitomize the world's new direction. Financial markets
are virtually unencumbered, continuous, and worldwide.
globalization of markets did not happen overnight. The first
decisive action by financial markets occurred two and a-half
decades ago with the suspension of dollar convertibility into
gold and an abandonment of the system of fixed exchange rates
known as Bretton Woods. As a direct consequence of this momentous
eventuality, financial markets sought instruments of trade that
were responsive to a shrinking world and modern telecommunications
capabilities. In other words, innovations and products were necessary
to protect financial exposure as well as to capitalize on opportunities
resulting from rapid informational flows of the new world order.
process was initiated by the financial futures revolution of
the early 1970s when the International Monetary Market (IMM)
was launched at the Chicago Mercantile Exchange with the express
intent of developing futures trade in financial products. The
creation of the IMM led to the introduction of the first broad-based
risk management instruments and ushered in the Era of Financial
Futures. What followed was an unprecedented age of innovation
in corporate and international finance.
forces in business, global markets, and world economies—coupled
with advancements in computer technology—transformed the first
relatively simple IMM financial tools into the present genre
of complex derivatives. The academic world introduced the concept
of risk management and financial engineering became a commercial
necessity. Acceptance of this philosophy served not only to legitimize
derivative markets and bring them into the infrastructure of
established finance, it acted as a catalyst for the use of indexes
as instruments of trade and for the creation of a multitude of
other financial products traded both on exchanges and over-the-counter
Competition, and SIMEX
1982, I began to be concerned about the globalization effect
on markets and realized our Chicago markets were vulnerable to
market centers in other time zones that could duplicate or mimic
the contracts we had devised and invented. This led me to search
for a "partner market" in the Asian region. There were three
potential Asian candidates: Hong Kong, Tokyo, and Singapore.
Tokyo was eliminated from the very start since it did not appear
to have the legal and regulatory framework to create a futures
exchange at that time. Of the remaining two locales, Hong Kong
would have seemed the logical choice since it had a larger capital
market and was known as a free market center. However, at the
time, there was strife between the British governing group and
the native Chinese group.
on the other hand, had what might be called a "unification of
purpose." The government, the industry, and the people were all
joined in unison to actively promote the futures business. We,
at the Chicago Mercantile Exchange, were very encouraged to find
this and helped the Monetary Authority of Singapore (MAS) in
the creation of the Singapore International Monetary Exchange
(SIMEX) and establishing the first international linkage between
exchanges—the Mutual Offset System (MOS). It is noteworthy to
add that mutual offset had never before been tried and had the
potential to be quite dangerous. However, my belief in the Singapore
people and government, their willingness to work together, and
their responsible attitude served to mitigate my concern about
the MOS and made the effort worth the risk.
has proved me correct in the decision to select Singapore. SIMEX
grew to be one of the largest futures market in Asia and has
contributed significantly in many tangible and intangible ways
to the advancement of the Singapore economy. If there is a lesson
to be learned from this, it is that government should work in
conjunction with the needs of its financial community.
course, the SIMEX launch was prior to the technological tidal
wive. By 1986, I knew that technology provided a much better
answer to the competitive demands of globalization. Technology
now enabled us to consider an electronic exchange for international
trade whereby our markets could be traded for virtually 24 hours.
It was this thought that gave birth to GLOBEX.
could potentially do for the world what the SIMEX was able to
do for one contract and one region. GLOBEX would enable us to
list all our contracts around the clock, around the world. Since
all major exchanges have the same competitive concerns, we also
invited the world exchanges onto the GLOBEX system.
Benefits of Financial Futures to Emerging Markets
of the global economic need for financial futures and other financial
derivative markets can be of particular importance to all emerging
financial arenas and is of special relevance to Asia—the geographical
region with the potential of becoming the world's leading market
force in the 21st Century. Indeed, the Pacific Century is about
to dawn. With a population ten times greater than North America
and six times greater than Europe, and with a faster growth rate
than either region, Asia has the potential to overtake the other
two regions economically before very long. Last year, for instance,
Trans-Pacific trade exceeded trade across the Atlantic by 50%;
in five years, the ratio could be two-to-one in favor of the
development of a strong, resilient, broad-based cash market that
can support both exchange-traded futures contracts as well as
OTC derivatives is vital to this process. How quickly this will
happen will depend largely on how quickly Asian governments learn
to relax their tight monetary controls and permit the deregulation
of their financial markets.
is also most important to recognize that today is no ordinary
moment in financial history. It is the first time in modern history
that virtually every country on the planet has a market-oriented
economic system and is attempting to be a competitor in the global
marketplace. For the past 20 years we spoke of a global economy.
However, we were only talking about 25% of mankind—mostly North
America, Western Europe, and Japan. As recently as 1988, almost
70% of mankind was living under Marxist or socialist economic
systems. Suddenly, there are three billion more participants
in the Capitalist system.
even developing nations have become major players in demanding
capital. In 1993, emerging countries had capital inflows of almost
$110 billion, whereas as recently as 1989 they were capital exporters.
At the same time, many major industrial countries have current
growing capital needs as well.(1) Clearly,
to compete in this new financial order—both in terms of investments
as well as capital—it will be mandatory for Asian nations to
provide their institutions with access to the tools of modern
finance and portfolio theory. Liquid and efficient derivatives
markets are a primary prerequisite.
Establishment of Futures Markets in South Korea
have learned that South Korean President Mr. Kim Young Sam has
recently urged the Koreans to embrace globalization. I applaud
this course of action. The introduction of futures markets in
South Korea is a significant step in that direction. In preparing
for this historical event, your nation has experienced the same
pains and wrestled with some of the same questions as other nations
before you, such as:
instruments of finance should be created as futures markets?
government agency should regulate these markets?
there be more than one market?
there be more than one similar instrument?
should be the role of foreign nationals?
type of education and training is necessary for the Korean financial
and many other issues related to these new futures markets have
been discussed. Fortunately, you have a great deal of historical
precedent. You can learn from the mistakes of others and emulate
the successful solutions. But in the final analysis, the decisions
are yours to make and you will learn from your own experience.
as one who has been intimately involved with the creation and
launching of futures markets for over 25 years, allow me to offer
some insights. It has been our experience that the listing of
a futures contract on more than one market has the potential
to be detrimental to the development of that contract. For example,
while the listing of the same futures contract at more than one
market may provide for arbitrage activity, it will do so at the
expense of liquidity since order flow between the two markets
will be diluted. And for a futures contract to succeed, it requires
addition, we have found that futures markets should be governed
by a regulator who understands both the cash and futures markets,
the benefits of these markets, and the impact of its regulations
on that market. For if these markets are not governed in a coordinated
and responsible fashion, or if the regulations are too onerous,
you may find that the business will flow outside your nation
to other markets who can develop a competing product. And, if
your futures product is traded on other markets outside of Korea,
it is important to note that business flow will favor the contract
with the lower costs and the less burdensome trading requirements.
preparation for the opening of a futures market in Korea, I urge
you to continue educating prospective participants in the use
of these important risk management tools. For these markets—with
their ability to identify, price, and transfer existing risks—are
complex mechanisms that require special expertise. Education
is the key ingredient and the only answer. Building an army of
well-trained and knowledgeable professionals is an indispensable
element in the future health and growth of the Korean futures
congratulate you on the development of the Korea Stock Price
Index 200 (KOSPI 200). I am pleased to learn that the KOSPI 200,
is a capitalization-weighted index. As you know, most successful
stock index futures products in the world are capitalization-weighted
and are comprised of a broad range of actively-traded stocks
that are representative of the overall stock market. It is my
understanding that the KOSPI 200 meets all this criteria. Accordingly,
I believe you will have a successful stock index product.
addition, allow me to congratulate you on your decision to move
forward with an electronic trading system. Since the Chicago
Mercantile Exchange announced GLOBEX in 1987, the result was
a virtual torrent of other electronic systems devised either
to extend existing trading hours or for the entire transaction
process. While most of these electronic systems were launched
for use within a limited local area, the specifications of the
systems devised often contemplate larger geographic competence.
My prediction is that in the coming decades we will see a number
of electronic systems for futures and options trade on a global
24-hour basis. In my opinion, this represents the future of futures
Merton Miller, the 1990 Nobel Laureate in Economics, proclaimed,
financial futures are "the most significant financial innovation
of the last twenty years." Financial futures have become an integral
component of the world's financial system. Today, there are established
futures exchanges in London, Paris, Hong Kong, Zurich, Kuala
Lumpur, Barcelona, Sydney, Vienna, Toronto, Singapore, Sao Paulo,
Madrid, Osaka, Brussels, Zurich, Frankfurt, Buenos Aires, and
Tokyo. Soon Seoul will be added to this prestigious list. Futures
markets have became symbolic of the economic order that demonstrated
its supremacy over an economic system whose structure and function
was dependent on central economic controls.
no mistake about it: The value of financial futures is not an
imaginary notion. These instruments are not a selective luxury
that can be done without. Indeed, if the use of financial derivatives
as a hedge mechanism is excessively restricted, the consequences
to the world's financial fabric may be much harsher than anyone
realizes. It is this reality that is imperative for Asian governments
to recognize. In our global market environment, driven by constant
and changing market risks, instantaneous information flows, and
sophisticated technology, financial derivatives are an essential
instrument of finance, indispensable in the management of risk,
and of immense benefit to a nation's economy.
Hale, "Rethinking the World," Barron's, 22 August 1994.
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