Since its inception in 1955, the Futures Industry Association has transformed itself into the leading trade organization for the futures, options, and over-the-counter cleared swaps markets. Each year, the organization has an expo, attended by more than 6,000 people from more than 30 countries, with many attendees serving as senior staff at brokerage firms and exchanges to floor traders, pension fund managers, and corporate treasurers. Last week, while attending the 29th Annual FIA Expo at the Chicago Hilton, I was reminded of my first Expo in 2006. While it’s been tough to work in derivatives, it appears as if those who work in this niche market of finance wouldn’t walk away from it for the world. Thankfully, this year’s FIA Expo brought good news for market participants, namely that there is a light at the end of what has been a very dark tunnel.
What Doesn’t Kill You Makes You Stronger
In 2011, as MF Global fought to survive, the global financial derivatives broker improperly transferred hundreds of millions of dollars in customer money to its banks and clearinghouses. While the dust was still settling from the controversy, the derivatives industry was hit again in 2012 by the news that Peregrine Financial Group (PFG) had a $200 million shortfall in customer funds. PFG CEO Russ Wassendorf is being sued by the Commodity Futures Trading Commission (CFTC) for creating false bank statements to hide the losses. Wassendorf was a respected member of the tight-knit derivatives community, so what happened with PFG felt like being kicked when the industry was already down.
Christopher Hehmeyer, the chairman of the National Futures Association (NFA), a self-regulatory organization that polices the futures and swaps markets, says that MF Global and PFG prepared the industry and made it stronger. In other words, the industry is now on the lookout for unethical behavior and is taking more precautions. The day before the 2013 Expo, the CTFC sued Alphametrix, accusing the Chicago-based firm of misappropriating at least $2.8 million and issuing false or misleading account statements to conceal fraud.
“We’re like New Orleans and Hurricane Katrina,” Hehmeyer said. “No one wanted to go through MF Global and PFG, but we are stronger now and have the infrastructure in place to react faster when we see something.”
Dodd-Frank and a Changing of the Guard
The word “hurricane” could also be used to describe the regulatory changes that have impacted the derivatives markets. In fact, some of the markets under the derivatives umbrella will never be the same again.
The Dodd–Frank Wall Street Reform and Consumer Protection Act, known as “Dodd Frank” for short, made sweeping changes to the financial regulatory environment, affecting all federal financial regulatory agencies and almost every part of the nation’s financial services industry.
Over the counter (OTC) contracts, or swaps, were derivatives traded off-exchanges, while futures are regulated and traded at exchanges. According to CFTC Chairman Gary Gensler’s speech at the Expo, as of last week the OTC markets had a notional value of about $400 trillion; the futures market had about $30 trillion in notional value. Clearly, the value of the OTC markets is significant and until Dodd Frank was implemented, these markets were unregulated and operating like the Wild West.
At the recent FIA Expo, it felt as if the OTC markets were the big, pink elephant in the room. Market participants were in a haze of regulation and unable to make business decisions because of the regulatory uncertainty. The FIA Expo provided a “SEF Showcase” for swap execution facilities (SEFs) with the goal of educating the public on their services. SEFs are regulated platforms for swap trading that provide pre-trade information and an execution mechanism for swap transactions. Prior to Dodd Frank, swap-pricing information was not available to the public.
During CFTC Chariman Gensler’s keynote speech at the expo, he talked about the importance of transparency in the swaps market, referencing Franklin Roosevelt’s presidency during the Great Depression and how he went to Congress for transparency reforms in the 1930s. Gensler said they transformed markets as an economic growth engine. The chairman’s speech encouraged a sense of hope, an approach the industry seems to have adopted as we enter this new chapter of regulation.
Gensler also shared this would be his last FIA Expo as chairman of the CFTC. He made the usual changing of the guard remarks and thanked the industry for coming to DC for open meetings. He also said the public helped shape the 65 rules outlined within Dodd Frank, which will help bring transparency and regulation to the swaps market. It is rumored that Timothy Massad, who heads the Treasury Department’s bank rescue program, has been tapped to succeed Gensler as CFTC chairman.
Mergers and Acquisitions
Another hot topic at the FIA Expo this year was this weeks’ sale of NYSE Euronext to the Atlanta-based Intercontinental Exchange (ICE), led by Jeff Sprecher.
The derivatives industry has seen many exchange mergers in the past few years. In fact, the New York Stock Exchange itself merged with Euronext in Europe to form NYSE Euronext in 2007. NYSE also acquired the American Stock Exchange and the Archipelago Exchange to form NYSE Amex and NYSE Arca, which operate under the NYSE Euronext umbrella
The FIA Expo’s hometown saw one of the most controversial mergers in derivatives history when the Chicago Mercantile Exchange acquired the Chicago Board of Trade in 2007. Expo attendee Diane Saucier, Head of Business Development for Celoxica, likened the merger to another of the city’s infamous rivalries.
“Imagine if the Chicago Cubs had merged with the Chicago White Sox to form a new baseball team,” Saucier said. “The cross-town rivals merged to form one of the most influential entities in the global derivatives market, the CME Group. ICE’s acquisition of NYSE Euronext will help them to better compete with the monolithic Chicago exchange while allowing ICE CEO Sprecher to take on market structure issues he feels should be addressed.”
ICE and NYSE Euronext employees are staying tight-lipped about the merger, but the topic is very polarizing. While efficiencies will be streamlined, redundancies will also be revealed and there will be job losses. Many in the industry took advantage of the expo by looking into other opportunities and seeing what talent will be available in the workforce once the two exchanges merge.
Turning a Corner
There are so many changes taking place in the derivatives market and the FIA Expo enables us to reflect on what the industry as gone through and where it is going. We will continue to see exchange mergers streamlining the industry. The regulation that once confused is now providing a sense of relief and strategic direction. There are also new leaders taking the helm in Washington, which will provide the industry with a fresh perspective. This year’s Expo participants were cautiously optimistic: no one is gung ho on how we got here, but they are glad we are around the bend.