cmefall2010low

7/29/2019 cmefall2010low

1/64

FALL 2010 A MAGAZINE PUBLISHED BY CME GROUP

WHEN DISASTER HITS p 16 JON CORZINE GETS BACK IN THE GAME p 12

THE NEXT LEVELof INNOVATIONp 2 8


2/64

UBS 2009. All rights reserved.

As the OTC markets expand into central clearing you need a partner you can trust.

With our experience, insight and established clearing services across exchanges

globally, we are well equipped to support you.

At UBS we look to understand your individual needs and build an intellectual

partnership in order to provide scalable and fexible consultative solutions;

delivering our market leading innovative services or the success o your business.

We have made signicant investment in our inrastructure and as we continue to

support our clients in every aspect o their Futures and Options business, we are

ready to guide you through the new landscape or OTC.

Contact us at [email protected]

OTC clearing

has arrived.

Talk to us aboutthe opportunities.


3/64

CME GROUP MAGAZINE

CME GROUP20 South Wacker DriveChicago, IL 60606-7499312.930.1000 tel312.466.4410 [email protected]

EDITORIAL DIRECTORSAnita Liskey, William Parke

EDITORIAL ADVISORY BOARD

Tim Andriesen (Commodity Products), Kate Darcy (Market Education), James Farrell(Technology), David Garland (Corporate Communications), Elizabeth Gisch (Globex Ac-count Management), Jeremy Hughes (EMEA Corporate Communications), Dave Lerman(Hedge Fund and Broker Services), Gail Moss (Marketing Communications), Robin Ross(Interest Rate Products), Derek Sammann (Foreign Exchange Products), Allan Schoen-berg (Social Media), Michael Shore (Product Public Relations), Scot Warren (Equity IndexProducts), Meg Wright (Legal), Jaime Yeh (Product Marketing)

CME Group Magazineis published by CME Group in conjunction withNewsdesk Media Inc. and VSA Partners, Inc. All rights reserved.

NEWSDESK MEDIA INC.700 12th Street, NWSuite 700Washington, D.C. 20005202.904.2423 tel202.904.2424 faxwww.newsdeskmedia.com

Jim Kharouf, Consulting EditorMaysoon Kaibni, Vice President, Business DevelopmentMarc Young, Sales ManagerVSA PARTNERS, INC.600 West Chicago AvenueChicago, IL 60654312.427.6413 tel312.427.6534 faxwww.vsapartners.com

ART DIRECTORSAnthony Collins, Newsdesk Media Inc.Brock Conrad, VSA Partners, Inc.

DO YOU HAVE A QUESTION FOR CME GROUP MAGAZINE?E-mail us at [email protected] with your questions and comments, or to be added to or

removed from the mailing list. Further information about CME Group and its products isavailable on our website at www.cmegroup.com. Information made available on our web-site does not constitute part of this document.The Globe logo, CME Group, CME, E-mini, Globex and Ideas That Change the World aretrademarks of Chicago Mercantile Exchange Inc. The Chicago Board of Trade and CBOTare trademarks of The Board of Trade of the City of Chicago, Inc. New York MercantileExchange, NYMEX and ClearPort are registered trademarks of the New York MercantileExchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. The Dow Jones Indus-trial Average and Dow Jones Indexes are trademarks of CME Group Index Services LLC.BM&F is a trademark of the Brazilian Mercantile & Futures Exchange S.A. BOVESPA StockIndex is a duly registered trademark of BM&FBOVESPA. KOSPI is a trademark of the Ko-rea Exchange Company Republic of Korea. NASDAQ is a trademark of The Nasdaq StockMarket, Inc. (which with its afliates are the Corporations). S&P and S&P 500 are trade-marks of McGraw-Hill Companies, Inc. Case-Shiller is a trademark of Case Shiller WeissInc. Green Exchange and Green Exchange Venture are trademarks of Green ExchangeHoldings LLC., used under license.Unless otherwise indicated, references to CME Group products include references toexchange-traded products on one of its regulated exchanges (CME, CBOT, NYMEX,

COMEX). Products listed in these exchanges are subject to the rules and regulations ofthe particular exchange and the applicable rulebook should be consulted.Information on trading strategies and products is included for educational purposes onlyand does not constitute trading advice or constitute a solicitation of the purchase or saleof any futures or options or guarantee any particular trading result. The rulebook of theapplicable exchange should be consulted as the authoritative source on all current con-tract specications.

Articles herein authored by third parties are taken from sources believed to be reliable.

2010 CME Group Inc. All rights reserved.CME Group Magazine is printed on recycled paper.

Politicsisnothingifit

isnotaplacetohave

astrongvoiceonthe

thingsyoucareabout.Itisagreatplaceto

givebackifyouare

properlymotivated.

FALL 2010

Issue 19

ON THE COVERFinancial innovation is the lieblood

o the fnancial markets. Whats

coming next in an environment thatdemands increased transparency,

greater accountability and lower risk?

To read CME Group Magazineonline, as wellas view Podcasts, Webinars and more, visit

us at www.cmegroup.com/magazine.

JON CORZINE,

CHAIRMAN AND CHIEF EXECUTIVE OFFICER,

MF GLOBAL HOLDINGS LTD.


4/64


5/64FALL 2010

20 Chinas Copper KettleMake no mistake, China still stirs the

copper market.

24 Breaking Up Is Hard to DUBS economist Paul Donovan looks at th

cold hard facts for the euro.

35 Handicapping the FedA look at short-term interest rate liquidit

the latest tool from CME Group FedWa

38 Interest Rate Outlook:Low and SlowInterest rates continue to hang at record

lows. So a hike is sure to come soon

or maybe not.

FALL

IsCONTENTS

28 The Next

Frontier

o Market

Innovation

Heres whats next on the horizon

or fnancial innovation.

8 From The TopA letter from CME Group

Executive Chairman and CEO.

12 Jon Corzine Backin the GameJon Corzine talks about politics and

his new role as MF Globals new CEO.

16 When Disaster HitsFirms and agencies are prepping

for the worst, and thats good news.

201612


6/64

Ex

Experience

36

In

Insight

360

Re

Relationships

4/7

mfglobal.com

The products and services mentioned herein are available from MF Global Holdings Ltd. subsidiaries located

jurisdictions worldwide and registered with local regulatory authorities as may be required. Products and servic

may not be available in all jurisdictions. Please consult www.mfglobal.com for more information. Trading

nancial instruments may involve signicant risk of loss. Nothing contained herein should be considered as a

oer or the solicitation of an oer to sell or to buy any nancial instruments. 1 MF Global Holdings Ltd.

When the chemistry is rig

success is inevitable.

As a leading cash and derivatives broker, MF Global

transforms market risk and opportunity into our clients'

advantage. By applying the key elements of success honed

through a heritage of 225 years of market leadership, we

create targeted solutions for clients around the world. Deep

market experience, actionable insight, and productive,

long-standing relationships are the elements we combine to

deliver exceptional results.

To learn how MF Global can turn the elements of success into

your advantage, visit mfglobal.com.

Ex

Experience

36

In

Insight

360

Re

Relationships

4/7

mfglobal.com

The products and services mentioned herein are available from MF Global Holdings Ltd. subsidiaries locate

jurisdictions worldwide and registered with local regulatory authorities as may be required. Products and serv

may not be available in all jurisdictions. Please consult www.mfglobal.com for more information. Tradin

nancial instruments may involve signicant risk of loss. Nothing contained herein should be considered a

oer or the solicitation of an oer to sell or to buy any nancial instruments. 1 MF Global Holdings Ltd.

When the chemistry is rig

success is inevitable.As a leading cash and derivatives broker, MF Global

transforms market risk and opportunity into our clients'

advantage. By applying the key elements of success honed

through a heritage of 225 years of market leadership, we

create targeted solutions for clients around the world. Deep

market experience, actionable insight, and productive,

long-standing relationships are the elements we combine to

deliver exceptional results.

To learn how MF Global can turn the elements of success into

your advantage, visit mfglobal.com.


7/64FALL 2010

59 Current Pulsezz In the Palm of Your Globexzz Wharton Hedge Fund Conferencezz Simplify Itzz Calgary Connectionzz Green Lightzz The Story of Innovation

62 Finding Green inUnexpected PlacesCME Groups new data center is the size

of four NFL football elds and just as green.

CONTENTS

42 State Capitalistson the Fast TrackIan Bremer looks at the hybrid capitalist

state in his new book The End of Free Markets.

46 The Algorithm of SuccessPrague-based RSJ rises to be one of

the biggest trading rms on CME Group.

51 Korea Exchange GoesInternationalKorea Exchange brings its Kospi 200

index futures global.

55 Got an Eye on YouTechnology watches traders.

42 24

Featured on cmegroup.com/magazi

Central counterparty clearing services have exist

the over-the-counter (OTC) derivatives market fonumber of years. Expanded OTC clearing will req

market participants to rethink the way they struc

and trade OTC derivatives.


8/64

Craig Donohue (left) and Terry Duffy (right)

8 CME GROUP MAGAZINE


9/64

TERRENCE A. DUFFY

Executive ChairmanCRAIG S. DONOHUE

Chie Executive Ofcer

FROM THE TOP

FALL 2010

Details create the big picture, but when it comes to the nancial reform legislation that President Barack

Obama signed into law this summer, many of the details remain to be seen.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most sweeping rewrite

of U.S. nancial regulation since the 1933 Glass-Steagall Act. The new legislation is a comprehensive

banking and nancial services reform package that includes signicant changes to the oversight of

derivative markets. The Dodd-Frank Act contains numerous provisions that have an impact on how over-

the-counter (OTC) and listed derivatives are traded. More standardized OTC derivatives will trade onexchanges or other trading platforms, and will be routed through clearinghouses post-transaction. U.S

regulators will also be involved in setting capital and margin requirements for dealers and major traders

and crafting new business conduct standards and reporting requirements.

Exactly how and, to a certain extent, when this will be done has been left in the hands of the

Commodity Futures Trading Commission (CFTC) and other regulators and government agencies.

Because of that, the rule-writing process is considered to be nearly as important as the drafting of the

nancial bill itself. The bill gives regulators leeway to ll in the blanks on key areas, so agency rulemaking

will determine the nal shape of reform.

An important concern raised about nancial reform is that it could potentially stie nancial

innovation. Innovation has always been a driving force at CME Group. Our cover story for this issue

looks at some of the signicant innovations of recent years and the outlook for new ideas, concepts and

products going forward. Other subjects covered in this issue include:

MF Global chief executive ofcer Jon Corzines perspective on the evolution of nancial

markets gleaned from his 30-plus year career in nancial services and public service. The rise of state capitalism and the challenges it presents to free markets as perceived

by noted political risk consultant Ian Bremmer.

China's rapid ascendancy up the global economic ladder and the impact of its growingdemand for copper.

We hope the details you nd in this issue of CME Group Magazine will begin to give you the big

picture as we move through this next, historic stage in nancial markets.


10/64


11/64


12/64


13/64FALL2010

Back in the Gamejon corzine

jon corzine returned to the financial industry in march 2010as chairman and chie executive ofcer o MF Global

Holdings Ltd. ater spending the previous decade in public ofce. Corzine served as governor o New Jersey rom 2006 to 2010, andin the U.S. Senate rom 2001 to 2006. Prior to that, Corzine was chairman and senior partner at Goldman Sachs, where he spent

more than 20 years. CME Group Magazine sat down with Corzine to hear his thoughts about coming back to the industry, his vision

or MF Global and where todays regulatory environment will lead the frm in the coming months and years.


14/64

14 CMEGROUPMAGAZINE

BACK IN THE GAME

With your long career in the nancial services in-

dustry and in politics, why did you decide to take

the chief executive ofcer position at MF Global?

This is an underdeveloped asset, not only as a

utures commission merchant (FCM) but also

as a broker-dealer and engaging in activities well

beyond what this frm has been traditionally in-volved in. Im excited about repositioning a good

ranchise into what I think is a pretty attractive

space thats been created frst by globalization

and the change in the way the general fnancial

services industry operates. Whether you do that

in the context o fnancial regulatory reorm or

Basel, Basel III or any other changes, that plays to

the core strengths o the ranchise.

You left Goldman Sachs in 1999 and served in

political ofce for a decade. What experiences do

you take from those roles?

I was honored to serve in public lie. I saw the im-

portance o the role o government in shaping the

macro- and micro-environment beore I got into

government. So I had some o the same rustra-

tions that many people have. I had a lot o views

about the direction, not just on fnancial and eco-

nomic activities, but also in education and other

areas. Politics is nothing i it is not a place to have

a strong voice on the things you care about. It is a

great place to give back i you are properly moti-

vated. The execution is ocused on the people you

serve, as opposed to serving yoursel.

Financial reform was just completed. What impactdo you see it having on the derivatives and broker-

age space?

First, it is a positive or the economy. Maybe the

most important piece is the central oversight

board or all aspects o the U.S. fnancial system.

Even with the chair o that oversight board be-

ing the Secretary o the Treasury, most o the

real work will be done by sta o the Federal

Reserve. Thats good because in a time o crisis,

our fnancial system will have the immediate

levers o the Fed. And they have the ability to

understand the system signifcantly better than

all o the regulatory agencies did beore because

they can identiy signifcantly risky institutions.Having clearinghouses, variation margin, sys-

tematic recognition o the existence o risk and

how it is managed, really needs to be part o the

fnancial system. Sometimes there needs to be

position limits placed on participants based on

their capital. The derivatives part o the legisla-

tion is great or the system because it will bring

more capital in and make it less risky. Then peo-

ple will invest more and the economy will grow.

So does that leave MF Global in a good position, be-

cause youre of course a large clearing member rm?

We have the knowledge and expertise to deal with

exchange traded and cleared products that should

give us an edge. On the other hand, the price o

entry may be so high in some areas that places

like MF Global will be challenged. So we willhave to work with the dominant clearing players

in some other ormat to meet the requirements

o the system, but not be precluded rom them.

There is a lot o work yet, to make sure the system

is not exclusionary.

It is still just a few months since you took the reins

at MF Global, but what can you tell us of the plans

going forward?

There are a lot o good people working here.

There is a lot o know-how. That provides a solid

ramework to build upon. We have a very signif-

cant client group with a very good deposit base.

We know some markets really well such as metals

and energies. Were one o the premier FCMs in

India. There are niches o extraordinary strength.

Were moving along in other core businesses such

as equities and fxed income and have a strong

oreign exchange business. We recently conduct-

ed a stocking oering to signifcantly improve our

equity position. We refnanced our liquidity acil-

ity. Weve done a lot o things I think will lead us

to a great position going orward.

One o our problems has been that we have not

been a principal risk taker to acilitate our clients

in listed markets. That will change and provides a

very strong means to expand our relationship withclients and can be done without turning into a pro-

prietary trading shop, or one with excessive risk.

And on that score, fnancial regulation is

also important. The deleveraging o the system,

changes to the regulatory systems, means a great-

er opportunity to access clients who want risk

intermediation but now wont have access at

those same kinds o leverage elements with some

o the existing participants. I dont think there

will be any less demand or risk intermediation.

That demand will ow to other aspiring institu-

tions, and we intend to be one o them.

The brokerage business, especially non-bankbrokers, has been hurt by the low interest rate

environment over the past year or two. How can

MF Global navigate that environment?

First, i you limit yoursel to brokerage alone,

that clearly is a challenge. But we dont intend

any longer to be just a pure brokerage frm. We

want to be a broker-dealer and perhaps expand

into advisory and/or portolio management ser-

vices over time. So i you are strictly lim

commissions, you will be limited. Itll

when interest rates rise, rom the sta

that our customers will want more inte

tion in a rising interest rate environm

that also comes with risks on the princip

There are some who believe that nanc

neering such as collateralized debt ob

(CDOs) and credit default swaps (CDS)

U.S. and global economy in peril. Financia

is designed in part to police some of these

cally new products. Will we still see na

novation in this new regulatory environm

Absolutely. People are working on reftti

ritization so it will have greater transpare

simplicity. It will be dierent but once t

are set, people will work creatively with

constraints. I think change begets innova

Todays markets are more global and interc

than ever. MF Global is truly a global rm

regulation be administered on a global bas

Yes, in an ideal world. But theres a l

cooperation among governments and

tors today with common accounting st

and common bank capital charges. Im s

once other countries take on the challe

president and Congress just completed,

get some matching up o the systems on

basis because people understand that re

arbitrage was as much a part o fnanc

as CDOs and CDSs. I there are gaps, it cthe whole system.

What does the global derivatives landsc

like to you now and going forward?

Youre going to have a globally integrated

It wont be perect. Youll have a greater

tion that there is a high degree o rela

between all asset classes that gets ree

exchanges. And there will be a greater div

tion o risk and intermediation. And that

to leave room or new entrants, or new p

various parts o the marketplace. Certain

mid-sized broker-dealer/investment banthere is plenty o room to grow and Im

about it.


15/64

Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking afliates of

Leveraging every facet of global commodities.

Understanding and insight into the multiaceted global commodities markets is a critical

advantage. Our commodities team leverages this insight to customize client solutions across

a wide array o products including structuring, trading and marketing o metals, crude oil,

refned products, natural gas, coal, power, emissions, commodity indices, structured notes,

wet and dry reight and weather products. Whatever your challenges, we deliver a perspective

that can help you shine in any market.

Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking afliates of Bank of America Corporation (Investment Banking Afliate

the United States, Banc of America Securities L LC and Merrill Lynch, Pierce, Fenner & Sm ith Incorporated, which are both registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, locally registered entities. Investment pr

Investment Banking Afliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed. 2010 Bank of America Corporation.


16/64

16 CMEGROUPMAGAZINE


17/64FALL2010

Unexpected events can wreak havoc on bus

operations, but the difference between a m

disruption and a disaster can come down to

preparation and ability to deal with surprise


18/64

18 CMEGROUPMAGAZINE

Testingand varyingo testingscenariosis the

numberonelessonlearnedrompastdisasters,

says JohnRapa, president and chie executive

ofceroTellesenandCompany,afnancialser-

vicesmanagementconsultingfrm.Asignifcant

businessdisruptionoracrisisisabadwaytofnd

outyourplandoesnotwork.

Rapasaysnotonlyhastestingoprimaryand

backupsystemsbecomestandard,butpotential

businesspartnersandregulatorsaredoingmore

rigorousanalysisthatmaybeshared.Groupssuch

astheFutures IndustryAssociation (FIA),where

Rapaservesaschairmanothebusinesscontinu-

itycommittee,haveoeredcommontestingdates

or theindustryto test resiliency and prepared-

ness.TheFIAandSecuritiesIndustryandFinan-

cialMarketsAssociationhave commonindustry

disasterrecoverytestssetorOct.23,2010.

Rapasaysthecoreobusinesscontinuity

planning identifes what businesses, systems

orprocessesareconsideredcriticalto theindi-

vidualcompany.Fromthereabusinesscontinuity

strategyisormedthatcancovereverythingrom

technologyintheworkplacetothedeathothe

chieexecutiveofcer.

KennethWolverton, vicepresident o data

center operationsatCyrusOne,whichoperates

corporateco-locationacilitiesinHouston,Dallas

andAustin,says businesscontinuity previously

wasocusedonthetechnologyside,butnowthe

peoplesideisreceivingattention.

ItsnotjusthowcanIbackupdata,buthow

can I takepeople tothenew location, dothey

haveplacesto shower,placestosleep iitsan

extendedtime,Wolvertonsays.

WHEREVER YOU AREOnegrowingtrendisal-lowingandenablingemployeestoworkrom

homeincasesoemergency.Technology

hasalloweddesktopvirtualizationwhereemployeescanaccesstheirworkcomputer

romhomeoranotherremotelocationto

becomeaviablealternative.TheH1N1u

outbreakunderscoredtheneedtoplan

businessoperationswhenemployeeswould

beunabletoenterbuildingsbutaccessto

systemswasstillpossible.

The H1N1 u pandemic also underscored

how important communication is between

businesses and the government. Groups like

ChicagoFIRST and the Financial Services Sec-

torCoordinatingCouncil (FSSCC), areprivate-

public partnerships that work on a regional

and national level to help members with best

practices. These partnerships are unique as

theybringtogetherfrmsandorganizationsthat

mightnormallybecompetitors.

Brian Tishuk, executive director or Chica-

goFIRST,saysoneresultocollaborationsbetween

frmsandthelocalgovernmentistheChicagoCriti-

calInrastructureResilienceTaskForce.Launched

inApril,thetaskorceaddressesevacuationplans,

credentialing and inormation sharing between

publicandprivate,andprivateandprivategroups.

Its teamingup toknowwhatthe govern-

mentsplansareinanemergencyandhowfrms

canbepartothesolution,Tishuksays.

ShawnJohnson,chairoFSSCC,sayssuch

private-public partnerships help coordinate re-

sourcesduringacrisisonsomeothemostprac-

tical matters such as simply identiying where

citizens can withdraw cash. During the Texas

hurricanes last year, FSSCC and the Financial

ServicesInormationSharingandAnalysisCen-

ter monitored ATM transactions to see what

areashadpowerandwhichATMswereable to

dispensemoneytogetundsdistributed.

OneconcernabouteventsliketheH1N1pan-

demicisthatInternetaccessinareasoutsidea

businessdistrictcanbelessthanrobust.Therearegenerallyewerfberopticlinesinresidential

areaswheresomeonetelecommutingcouldbe

competingorbandwidthwithaneighbordown-

loading amovie. That canslowdown Internet

access andbecomean issuei telecommuting

workers have to share bandwidth with non-

businessusersduringanemergency.

You cantperormcriticalbusinessopera-

tionsiyourenotrealtime,Tishuksays.

ChicagoFIRST advocatespriority b

accessortheInternetincasesonatio

sis. There already are priorities or tel

and wireless access, but such priorit

neededortheInternet.Rulesontheto

needtobeworkedoutbetweentheDepa

o Homeland Security and the Federa

municationsCommission.Butthatisye

reconciledwiththecurrentideaonetn

ity which provides everyone equal actheInternet.

Yesthereshouldbenetneutrality,

says.Inthecaseocyberattacks,there

siretohaveakillswitchtotheInternet.

plywantapriorityswitchduringemergen

FINDING SECURITYBecausetheInternebecomesuchapartoeverydaylie,cy

securityhasbecomeagreaterpartor

iencyprograms,expertssay.Whetheri

simpleasaphishingscamtosomeon

ingtoshutdownsystems,cyberthreat

becomemuchmorevisible.

JohnsonsaysFSSCChaslookedatt

romcyberspaceandisworkingtoimprov

ligencesharingwiththeederalgovernme

FSSCCstudyhighlightedthethreatrom

seacommunication cables to the intern

fnancialsystem.Theorganizationhasal

askedorinputonabillsponsoredbyU.S

torJoeLiebermancalledProtectingCybe

asaNationalAssetActo2010,whicho

onhowitwouldaectfnance.Thisbillsu

establishing a directoro cyber security

private-public partnershipto setnationa

securityprioritiesanddeenses.

Thepooreconomycouldcausesom

nesstolookwarilyatcosts,Wolvertonsa

soarthatdoesnotseemtobe theca

moreproactivefrmstelltheirinvestorsth

haveinrastructureinplacetoavoidasig

businessdisruptionduringacrisisordisa

Yes,GodzillamightnotriseromLak

igan,butwhowouldhavethoughtplane

yintobuildings?Rapasays.Peoplemaneverwillhappen,butneverisalongtime.

Another intangible asset that is a

businesscontinuityplans:imageandrep

The BP oil spill is the most prominent

exampleonotbeingproperlyprepareda

cautionarytaleorcompanies.

WhatsthePRloss,especiallyiyour

liccompany?Wolvertonasks.Thepublic

asking,whydidntyouhavethatputinpla

The past decade has offered its share of unforeseen events 9/11, the

H1N1 flu pandemic, the Northeast blackout of 2003 in the United States,

Hurricane Katrina in 2005 all of which tested the resiliency of business

operations. Smart companies used lessons from these events to build

business continuity plans for use when emergencies strike. These plans

focus on critical needs to return to as normal a business pace as possible.

Proactive companies then review and test those plans to make sure theyare operable when needed. The financial services industry is no exception.

You cant perform critical businessoperations if youre not real time.BRIAN TISHUK, executive director, ChicagoFIRST


19/64

Newedge refers to Newedge Group and all of its worldwide branches and subsidiaries. Only Newedge USA, LLC is a member of FINRA and SIPC (SIPC only pertains to securities-related transactions an

Not all products or services are available from all Newedge organizations or personnel and restrictions may apply. Consult your local oce for further details.

As an impartial multi-asset broker, were focused on your success. Solid and reliable,

we combine powerful liquidity capabilities with leading-edge technologies and a spirit

of partnership that extends across more than 20 nancial centers worldwide.

EXECUTION CLEARING PRIME BROKERAGE

Every winner needs

a trusted partner.


20/64

CHINASCOPPERKETTLE

20 CMEGROUPMAGAZINE


21/64FALL2010

Intheworld ofbasemetals,Chinais theel-ephantintheroom,saysDavidThurtell,aCiti-groupmetalsstrategist inLondon.Thereisno

escapingthecountrysdemandforcopperanditcannotbeignoredanymorethanChinasrapid

ascendancyuptheglobaleconomicladder.China has eclipsed theUnitedStates as

theworldslargestconsumerofenergy.Soon,italsowill supplant theUnitedStatesas thetopmanufacturer,accordingtoprojectionsby

IHSGlobalInsight,aneconomicsconsultancy.

Whileit isnotthe onlygame intown intermsofcopperdemand,Chinaisbyfarthebiggestandmostimportant.Chinaimporteda record3.2millionmetrictonsofcopperin

2009,up119percentfromthepreviousyear.Since 2000,Chinas copper demand hasal-

mosttripled.NicholasSnowdon,commoditiesanalystforBarclaysCapital,estimatesChina

currently consumes about38percentoftheworldsrenedcopper.

ThoseprocessesarefarmorelimdevelopedeconomiesthanincountrieasChinaandIndia,Snowdonsays.

HOME GOODS

Inthesummerof2010,concernssurfacBeijing,afterreapingaricheconomich

froma$586billionscalstimulus,wasingthebrakestocoolitswhite-hotecoGrossimportguresforcopperfellin

328,230metrictons,downfrom396,71

rictonsinMayandwelloffthe477,220tonsimportedinJune2009.

CatherineVirga,seniorbasemetalsaatCPMGroup,acommoditiesresearc

says the June numbers were lowewewere expecting.But the real que

whetherthedownwardtrendwouldcoVirgadoesnotthinkso.

WhatwereseeinginChinaisresefforts,shesays.Thisisnotatypical

Thatscoming froma levelof below10percentinthe1980s,Snowdonsays,addingthat amove toward 40percent oreven be-

yondisnotoutofthequestionoverthenextfewyears.

Thefuturebodeswellfortheseeminglysymbiotic relationship between China and

copper,eventhoughtheInternationalCopperStudyGroupestimatesa13percentdropinthecountrysdemandforcopperin2010.Ris-

inglivingstandardsintheworldsmostpopu-

lousnationChinaspopulationisforecastedtoincrease from1.3billionthisyear to1.43billionby2020 meansmoreautomobiles,electricitygenerationandpowerlines,hous-

ing,airconditionersandinfrastructure,someof the copper-rich comforts to which the

Westhasgrownaccustomedfordecades.Inshort,agooddealofChinascopperdemand

isrelatedtoresidentialconstructionandin-frastructureexpansion.


22/64

CHINAS COPPER

22 CMEGROUPMAGAZINE

coppermarket.Wehave seenmany periodsofrestockinginChina.Itdependsonhowyou

calculatedemand,whetheryouadjustforre-stockinginventories.Itscomplicated,whichis

whyestimatesvarysomuch.InJune,particularlythelatterpartofthe

month,Weve seen demand from Asia thatwasat-lining,movingtowardverylowlevels,Virgasays.Thenitstartedtoriseandinlate

Juneitpickedupkindof,withforce.Copper stockpiles usually rise in the

summerwith the traditional lull in NorthernHemisphere manufacturing. Through mid-

July,though,stockpilesdeclined,accordingtoThurtell. And prices reected the change.Copper futures for September delivery at

CMEGroupwerejustabove$3.00apoundinmid-summer,comparedwith$3.60inApril.At

theLondonMetalExchange,copperforthree-monthdeliverywasaround$6,600ametricton.

InApril,copperhadirtedwith$8,000aton.

SUPER-CYCLE ME

Just a few yearsago, copper circlesbuzzedwithspeculationthat themetalwasentering

acommoditysuper-cycle,meaningapriceof$8,500 per metric ton that could bemain-

tainedforaprolongedperiodoftime.Muchofthattalkwasmutedbythe2008globaleco-nomiccrisis,particularlyintheUnitedStates

andEurope.

Snowdoncontendsthemarkethasbeenoverlyconcernedabouteconomicuncertain-ties recently, whether thats the Europeanscalissuesortheeffectsofpolicytightening

takingplaceinChina.Oureconomistsforecastshaveheldrm

totheviewthattheglobaleconomicrecoverywillbesustained,andasaresultwebelievethe

markethasoverreactedtotheseconcerns,hesays,addingthatChinaanditsfuturegrowth

projectedbythe InternationalCopperGrouptoincreaseby6.7percent,with

ityutilizationratesseenimprovingfrompercentin2009to84percentin2010.A

growthof only 2.9percent is envisio2011becauseofdeferralsanddelaysi

projectspromptedbytheeconomiccrisThe entire industrialization proc

China should continue to support su

globaldemandgrowthincopper.ElectriinChinawillcontinuetosupportrobust

incopperdemand,saysSnowdon.Yogreater emphasis on electric vehicl

thatslikelytosupportcopperusageastherewillbehighercoppercontentinevehiclesthanintraditionalcarsandtru

Chinaandcopper,sumsupThurtebullishmetalsstoryanditwillremainth

forsomeyears.OnceChinashaditsdIndiasturn.

pathhavecertainlycreatedanewdynamictocommoditymarkets.

Sowherearecopperpricesheadedoverthenextsixmonthstoayear?Mostlikelyup-

ward,analystsagree,althoughtheirforecastsdiffersomewhat.

Wethinkcopperisgoingtoholdatthe$6,000metric ton mark and maybe go ashighas$7,500nextyear,saysThurtell,who

admitsheisnotasbullishassomewhosaytheprice couldclimbas high asthe super-

cycleprice.Healsobelievestherewillbesig-nicantproducersellingoncecopperheads

backabove$7,500.Virgapointsout thatprice forecasts for

thethirdquarterof2010havecopperaverag-

ingabout$6,830permetricton.Inthefourthquarter, CPM is forecasting a little more

strengthascoppermovesintodeeperdecitconditions, in terms of production and de-

mand,soitwillbe$6,900.Given the copper balance for 2010 and

2011, currentprice levels in themid-$6,000

rangewillbeseenas abargainin ourview,says Snowdon. We expect market funda-

mentalsto tightenoverthenext 18months.Barclaysforecastfor2012callsforcopperto

average$8,500ametric ton, sowe expectrecordpricelevelsessentiallyoverthattime.

CHINA THE DRIVER

Chinaisexpectedtobethemainenginedriv-ingthatpricesurge.

Analysts say that will happen becauseChina, while a copper producer, depends

heavily on imports. Production, meanwhile,isbarelykeepingpacewithdemand.Andfew

newmineprojectsarescheduledtocomeonlineinthenextcoupleofyears.Soafterbeing

limitedbyoperationalconstraintsandtempo-rarycutsin2009,mineproductionin2010is

CME Copper Volume forJan-Jun 2009 and Jan-Jun 2010

Electronic Volume Pit Volume

Jan-09

Jan-10

Feb-09

Feb-10

Mar-09

Mar-10

Apr-09

A

1 0

May-09

Jun-09

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0


23/64

www.globalrisk.com

Phone: +1 (312) 588-1300

Email: [email protected]

Bringtransparency

to your riskFirmRisk is the industrys leading

real-time market risk management

system. Tight integration with your

multiple data sources lets you

consolidate and transform raw data

into valuable, actionable risk

information on a single screen. Our

rich set of risk management tools let

you monitor and report risk, model

volatility, test market scenarios and

generate risk alerts for the firm as

well as for customers.

FirmRisk is a scalable solution for

large and small institutions. Contact

GlobalRisk to find out more about

FirmRisk and how you can benefit

from our nearly 20 years of risk

management expertise!


24/64

24 CMEGROUPMAGAZINE


25/64FALL2010

WHAT IS THE MATTER WITH THE EURO?

In 2010 we have seen the single currency fall in value,

bond spreads widen out and extraordinary measures estab-lished to aid Greece and potentially other sovereign states.The irrevocable monetary union that was established bythe Treaty of Maastricht has even had some commentatorssuggest that it might be time to revoke membership forsome of the participants.

In fact, much of what we see this year is the symp-tom of the disease, not the cause. The Greek scal woes,the volatility of nancial markets and the divergence ofgrowth are all in response to a single underlying problem the euro does not work.

THREE CRITICAL ELEMENTS

Three basic criteria were necessary to make the euro aneconomic success. First, there had to be a political desire

to participate. That was the easiest hurdle to membershipas most countries wished to join (the exceptions wereDenmark and the United Kingdom).

The second criterion was a reasonable balance sheet.Government debt and decit levels had to be at manage-able levels. Levels were actually spelled out in the Treaty ofMaastricht a maximum 3 percent gross domestic product(GDP) decit, and a maximum 60 percent GDP debt level.However, these were arbitrary and glossed over.

The most critical criterion for a successful euro wasthat the participants had to have economies that were fairly

similar in their structure and growth patterns. In a currencyunion, the components share a single interest rate and asingle exchange rate. Setting an appropriate single interestrate to be shared by one country or region that is growing at3 percent a year, and another that is growing at -3 percent ayear is pretty much impossible. The real economies need toconverge and stay converged. On this basis, the euro couldprobably have comprised six economies Germany, France,Austria, Netherlands, Luxembourg and, with some gener-osity as to debt criteria, Belgium. Beyond that, the euro isdoomed to fail economically.

So, if the monetary union does not work, does thatmean it is about to fragment? Absolutely not. The issuewith the euro and indeed any monetary union, is that evenif it is inadvisable to join, it is even more inadvisable to

leave once one is inside.

SEVERANCE COSTS

The costs of departure are huge. A weak economy thatleaves would almost certainly default on the nationaldebt. The debt is denominated in euros, of course. Leavingwould mean that the exiting country has a new nationalcurrency the nuova lira, or the new drachma or the nou-velle franc. With no tax revenue in euros, it is almost im-

The Treaty of Maastricht, signed in 1992, brought the birth of the euro in 1999.

The currency has been a success in the view of many but the nancial crisis has exposed

cracks in the currency as certain European countries saw their economies spiral

downward faster than others. Now UBS economist Paul Donovan takes a provocative look

at the pluses and minuses for the worlds second largest reserve currency.


26/64

w w w . P l a t t s H a s T h e D a t a . c o m

Regardless of commodity or region, the leading provider of energy and metals

market information has the data you need. Trust Platts to energize your business

and power your decisions.

ALL THE DATA YOU NEED

s h i p p i n g

p e t r o c h e m i c a l s

r e n e w a b l e s

c o ao i l n a t u r a l g a s

m e t ae l e c t r i c p o w e r

Fuel your decisions with all the data

coming out of the energy markets.


27/64

Paul Donovan is managing director and deputy head of global economics at

UBS. He is responsible for formulating and presenting the UBS Investment

Research global economic view, drawing on the banks world-wide resources.

FALL2010

possible to pay even a part of the national debt. However,countries can default or restructure debt within the euro.Indeed, there is a distinct possibility that at least one weakeconomy will restructure in the next few years.

What makes a euro exit even worse is that the corpo-

rate sector will in all probability have to default. Corpora-tions will have euro liabilities to overseas banks, or in theform of bond issues. Their domestic revenue streams arenow in the new national currency. A default event, and thesubsequent banishment from international capital mar-kets, seems inevitable.

The default story is bad enough, but it does not stopthere. The domestic banking system is likely to be de-bauched in advance of any euro exit. Depositors who fearthat a country may exit the euro are likely to turn up attheir banks in advance of the exit, clutching large suitcasesand demanding that the contents of their bank accounts behanded over in euro notes. In short, a run on the bankingsystem precedes the departure from the monetary union.

Finally, departure from the euro almost inevitablymeans departure from the European Union (EU). Certain-ly, that is the conclusion of the European Central Banks(ECB) legal advice. Trade ties with all an economys keytrading partners are broken. Any attempt by the exitingcountry to devalue the new currency will be met with tar-iffs from the remaining EU members. (Tariffs cannot, ofcourse, be applied within the EU as it is all effectively in-terstate commerce.)

So, a euro exit means sovereign default, corporate de-fault, a major negative growth shock, a debauched bank-ing system, exit from the EU, tariffs against ones exportsto eurozone countries and the ending of most major traderelations. Considering that, major civil unrest has to bethought likely as well but that is perhaps left to one side

in the analysis; it would not do to be too pessimistic.The euro does not work, but departure seems unlike-ly given the horric consequences. Does this mean thatthe euro area is condemned to a dire economic future?Not necessarily.

THE RIGHT ROAD

There are three routes to making the euro work routesfollowed by the United States in the 1930s after the ef-fective collapse of the U.S. monetary union in 1933. Therst is labor exibility or pay restraint. If areas with highunemployment restrain wages they eventually becomemore competitive and balance is restored to the monetaryunion. This has happened in parts of the eurozone, but itis unlikely to be a universal solution. Germany and other

north European states may pursue this. There is little evi-dence of the southern European states embarking on sucha course of action. France, in this context, should probablybe classied as a southern European state.

If labor exibility does not apply, there is always la-bor mobility as a second option. Unemployed workersmove in search of jobs. Europe, sadly, has no John Stein-beck to urge the process on. Workers are not movingacross national boundaries.

The third option remains and this is the path thatEurope is tentatively embarking upon. Europe, like theUnited States 80 years ago, needs a scal union if it is tomake its monetary union more effective. That does notmean that weak governments are subsidized, but ratherthat weak economies receive a stimulus they do not haveto pay for, and strong economies are restrained. Thismakes the economy more homogenous and a single mon-etary policy more effective. The U.S. scal union does notmean the government of California receives direct assis-tance from the taxpayers of New York, for instance butit does mean that the citizens of California receive welfarebenets funded in part by the federal tax receipts fromNew York residents.

Can Europe do this? Probably. Fiscal confederation isthe way to think about it a simple redistribution mecha-nism without a strong central government. It will requiremore integration, however. This is where the difcultycomes in. Europe has achieved a great deal of integration

over the past half century but most of it has come out ofa crisis. The current crisis provoked further integrationsuch as the various bail-outs. For Europe to get to a scalconfederation, it would likely require a series of additionalcrises. Europe can solve its dysfunctional monetary union,but it will take time, ve years or more. The current crisisis just the rst in a series over that period.

Practically, what does this mean? The periodic crisesof Europe are likely to keep downward pressure on theeuro. Growth implications suggest the ECB will keep inter-est rates lower for some time. More signicantly, perhaps,it means that the international condence in the existenceof the euro will remain weak. The ongoing debt problemsof southern Europe keep the structural aws of the euroat the forefront of investors minds. Constant reminders

of the fault lines in the euro will be an effective deterrentfor euro appreciation. This is not to say the U.S. dollar is agood currency in the coming years the problems of thedollar make it a bad currency. The problems of the euromake it a worse currency, however.

1.20

1.25

1.30

1.35

1.40

1.45

1.50

Jun0

9

Jul0

9

Aug-09

Sep-09

Oct-0

9

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

EUR/USD FUTURE PRICES (USD per EUR)


28/64


29/64

THE NEXT LEVELof INNOVATION

Financial innovations of the past 30 years, such as collateralized debt obligations, are getting much

of the blame for the current economic downturn. But in a globalized world with rapidly developing

technology, the need for new forms of nance and commerce continues. Here is what is on the horizon

in an environment that demands increased transparency, greater accountability and lower risk.

FALL2010


30/64


31/64FALL2010

IDEAS THAT CHANGE THE

The reality is that our globalized, highly developed world is dependent on

a cornucopia o fnancial instruments, many o them invented in the last

generation. Even some o todays most vilifed instruments, such as credit

deault swaps, continue to serve a key unction in acilitating the movement

o wealth and minimizing risk.

In act, the development and launch o new fnancial instruments is accel-

erating, according to a recent CME Group report New Product Success in

Futures Industry. CME Group more than doubled the number o new utures

instruments it introduced last year, rom 82 in 2008 to 188 in 2009. In the

same period, Eurex more than tripled its new utures products, rom 7 to 22.However, the acceptance o new instruments, as measured by new product

volumes, has generally slumped in 2009, ater a peak in 2008, the report notes.

The marketplace is a little hesitant to embrace new rontiers, says Julie

Winkler, CME Groups managing director o research and product develop-

ment, which developed the report. I think were going to move in a more

lateral direction or a while as the backlash rom credit deault swaps and the

bailouts settles in to the broader fnancial community.

FINDING ROOTS Resistance to new fnancial products also has deeper roots,

according to Harvard University economist and Nobel laureate Robert Mer-

ton. Speaking at CME Groups Global Financial Leadership Conerence last

year, Merton observed, There is a undamental mismatch between fnancial

innovation and the necessary inrastructure to support it. He also cited a

systematic bias against the new versus the old.

To create a riendlier environment or product development, Merton sug-gested that regulators require air value accounting or the purpose o trans-

parency. He also recommended an idea frst proposed by Andrew Lo, director

o the M.I.T. Laboratory or Financial Engineering the creation o an agency

o orensic-style analysts to investigate major events and fnancial ailures.

Both o these recommendations appear to have been incorporated to some

extent in the Dodd-Frank Wall Street Reorm and Consumer Protection Act,

which was signed into law July 19, 2010. The requirement that most deriva-

tives must be traded on public exchanges will establish air value accounting

or a whole new category o investments by setting daily market prices. And

although no investigative units have been established by the Dodd-Fra

a new Council o Inspectors General on Financial Oversight could w

ollowing major trails o oul play.

So what would successul fnancial innovation look like in the pos

sionary, Dodd-Frank era?

THRILLS AND TRILLS Yale University economics proessor Robert Shil

gested a number o orward-looking ideas in his article, Crisis and

tion, published in the spring 2010 issue o The Journal of Portfolio M

ment. Among his suggestions:Regulatory hybrid securities Developed by the Squam Lake Working G

periodic gathering o academics, these issues o bank debt would con

equity or troubled banks in the ace o extreme systemic crisis, thus

ing banks with new capital the result o not having to pay interest

bonds and averting government bailouts.

Continuous workout mortgages Proposed by Shiller in his book Subpr

lution, these mortgages would reduce a homeowners principal in th

o a wide-ranging decline in housing prices.

Trills Developed by Shiller and Stanord University economics pr

Mark Kamstra, the trill would be a share o a sovereign government

domestic product (GDP), which the government would sell as equiti

trill would pay a dividend equal to one trillionth o the nations curre

GDP and would be priced by the market.

Shiller is widely known or spearheading eorts to develop utures

tions markets or single-amily residences. He has worked with CME Gestablish market listings and he developed the S&P/Case-Shiller Hom

Indices with economists Karl Case and Allan Weiss.

Gary DeWaal, group general counsel or Newedge, one o worlds

utures commission merchants and a leading multi-asset broker, see

mand or commodity-linked deposit instruments in the near term.

I would think by this point investors would be tired o their zero-per

turns in their money market accounts and their savings accounts, DeWa

So i you can get a certifcate o deposit rom a bank with a gold-linked

that has a oor and other protections, I think there would be a market o


32/64


33/64


34/64

We know what makes your business tick. And we know how to give you

the customized solutions you need to compete. With CitiFX Pro, youll have

access to the same exible pricing and institutional-level liquidity that large

institutions have.

CitiFX Pro gives you:

Flexible pricing model highly competitive, transparent spreads

Institutional-level liquidity in 130+ pairs

Account opening usually within 72 hours of applying

FIX API, Prime Broker give up trades and MetaTrader

A personal Citi representative available round-the-clock

Citibank accounts held in the US are FDIC-insured up to $250,000 per account holder through December 31, 2013. Current regulations state that insurance coverage will revert to the level per account holder off

at the time whi ch is currently $100,000. Accounts in any currency held outside the US, including EUR, GBP, JPY and HKD, are not FDICinsured.

Are you a small hedge fund trading forex?

Get institutional-grade pricing with CitiFX Pro.

18773977670 (USA)

85225012382 (Asia)

0800-561-933 (Switzerland)

Go to:

www.citifxpro.com/cme

Email:

[email protected]

Talk to a CitiFX ProRepresentative

Also available for individual traders.

Im ready for institutional-grade pricing.

And so are my clients.

Qualied clients get free terminal access

when they sign up with CitiFX Pro.


35/64FALL 2010


36/64


PRODUCT FOCUS

CME Group Federal Funds futures have

become a favorite product of market

participants wishing to hedge interest

rate risk or get a read on near-term intere

rate expectations.

Earlier this year, CME Group launched

a new FedWatch tool that calculates th

rate expectations priced into any given

Funds futures contract.

A price quote in CME Group Fed Funfutures is 100 minus the average daily

eective Fed Funds rate for the delive

month. The FedWatch tool, introduced

ahead of the April 28, 2010, Federal Op

Market Committee meeting, performs

calculation and updates every 10 minu

Until October 1988, the specic sourc

of changes in short-term interest rate

forecasts were dicult to identify beca

nancial market forecasters relied on th

yields on short-term Treasury securities

their benchmark. Although changes in sterm rates were aected by anticipated

Federal Reserve policy actions, interest

movements were also impacted by chan

in expected ination, Treasury refundin

plans and other variables.

What happened in 1988 to change th

The 30-day Fed Funds futures bega

trading. It was in the 10 years that follo

that the contracts really started to bec

widely used by market participants as

hedging tool and to get a read on near-

interest rate expectations.However, interest in the calculation

has again grown due to continued

economic uncertainty and the FedWat

tool was born. The FedWatch tool is

available at http://www.cmegroup.com/

trading/interest-rates/fed-funds.html

Liquidity measures tend to focus on width

and depth of market. Market width may be

quoted in ticks or in dollars for orders of a

given quantity and market depth may be

measured in contracts at different levels in

the limit order book.

CME Group research shows liquidity in

interest rates was down slightly in the second

quarter of 2010 from very strong levels in the

previous quarter of 2010. The change was

attributed to the increase in volatility across

many market classes during the second quar-

ter as a result of the European debt crisis and

concerns that a double-dip recession may

be approaching.

Helping support liquidity in CME Group

interest rate products were market maker

programs implemented by the exchange, as

well as new technology that allows for elec-

tronic trade of complex options trades and

spreading. These programs were put into

play between 2005 and 2008.

Thomas di Galoma, head of U.S. rates

trading at Guggenheim Partners LLC, con-

tends that there will likely be some pressure

in front rate products going forward. Because

they have been low for so long, the market will

likely see a signicant attening of the yield

curve. He foresees a deationary environ-ment continuing through 2011 in the United

States and believes the Japanese investor

base is keen on the same deationary theme,

as they have seen similar trends in Japan over

the last 10 to 12 years.

When Federal Reserve Chairman Ben

Bernanke testied before the Senate Banking,

Housing and Urban Affairs Committee on July

21, 2010, he told senators that the economic

outlook was unusually uncertain, sending

shock waves through the equity market.

Many institutional investors currently

believe the Federal Reserve will raise interest

rates during the second or third quarter of

2011. The futures markets also reect those

sentiments. As of late July 2010, CME Group

Fed Funds futures were pricing in about a

76 percent chance of a 25 basis point hike

sometime before July 2011.

Mary Sirois, a market maker in CME

Groups Fed Funds futures, expects that

when the Federal Reserve begins to move,

trading will become active in a number of

contract prices. CME Group data showed

that as of June 2010, the majority of liquidity

in Fed Funds Futures could be found in the

near-term months: June 2010, July 2010 and

August 2010.

When the Feds moving, were rocking

too, says Sirois.

It is all relative though. CME Group re-

search shows that in the bigger picture, trad-

ing has been strong in short-term interest

rate products. Volume in CME Groups bench-

mark Eurodollar complex was up 39 percent

through the end of May compared to the

same period in 2009. And in the 30-Day Fed

Funds complex futures were up 80 percent

with options up an impressive 195 percent.

While a zero-interest-rate

monetary policy may have

helped to get the economy back

to its eet, it let the short-term

interest rate market fat on itsback. Then in February 2010,

Federal Reserve Chairman Ben

Bernanke announced plans to

exit this strategy. Other actors,

including the implementation

o market maker programs and

new technology, have served

to support interest in CME Group

Eurodollar utures and Federal

Funds utures products.

FEDWATCH TOOL FOR IR TOOLBOX

Fed Funds Futures Liquidity Top of the Book Liquidity by Contract Month

Fed Funds Futures Average Size of Best Bid/Ask,Globex RTH June 1-30, 2010

2,500

3,000

1,500

2,000

1,000

500

0 Jun10

Jul10

Aug10

Sep10

Oct10

Nov10

Dec10

Jan11

Feb11

Mar11

Apr11

May11

Jun11


37/64


38/64

38 CMEGROUPMAGAZINE


39/64


40/64

40 CMEGROUPMAGAZINE

GLOBAL INSIGHT

Onesignthatthispathcouldbechanging,Beltonpointsout,isijoblessclaimsalltothelow400,000rangeintandemwithjobcreationrisingto200,000to300,000amonth.Otherwise,heanticipateslittle

FederalReserverateactionbeoretheourthquarter.Osomeconcernis thathighconsumerindebtednessmay con-

tinuetocapspendingevenasjoblessnessimproves.Household debt toincome isnow about 110 percent, up rom

less than 80 percent at the beginning o last decade, Brien says.Consumercreditmonthatermonthhasbeendecliningalso,showingade-leveragingratherthanadesiretoincreasethedebtload.

Taking that into account with unemployment and other ac-torsmeansitistoosoontospeculatewhentheFederalReservemay

raiserates,hecontends.KeepingacaponinterestratesiswhatBrientermsaighttoquantity.Whileederaldebtissuanceisrunningata$1.5trillionannualizedrate,adeclineinmortgage-backedsecuritycre-

ation,commercialpaperandconsumerdebt-backedproductsmeansthatinstitutionalbuyersodebthavehadtoturnincreasinglytothe

U.S.Treasurymarket,keeping ederaldebt priceshigh, and in turn,interestratepressurelow.

Eveninsuchanenvironment,othersseetentativesignsogrowthandpotential rate pressure.Michael Pond, director andinterest ratestrategistatBarclaysCapital,allsonthebullishside.

Iconsumershavemoremoneyintheirpockettheyarelikelytospend,Pondsays.With theboostin GDProminventories likelyto

adegoingorward,youreallyneedconsumerspendingtotakeover.

Contrary to some predictions that the trauma o the crisis andtightercreditwouldspurhighsavingslevels,Pondbelievesspending

willcomeasterthanexpectedithelabororcestrengthens.One o the biggest actors that drives the savings decision is

interestrates,hesays,addingthatwhenconsumers lasthada high

rate osavings, in theearly 1980s, rates ranged rom 12percentto20.5percent,aworldapartromtodaysenvironmentowhatiseec-

tivelyzero,Pondargues.Addingto expectationso improvedspendingandpricingpower

are indications through private surveys like REIS Inc. that rent andequivalents,whichmakeupabout40percentothe coreconsumerpriceindex,havebeenrisingevenasederaldatasaystheyarenot.

Pondsaystheederalsurveylagsrealityon rentsandequivalentsby

threetosixmonths.Still,Pondisnotpredictingaswitreturnohigherrates.Byyears

end,heseesthe10-yearU.S.Treasurynotesshitingintoahigherinter-estraterange,butwithlittlechanceoFederalReserveactiononrates

themselves.Evenistrongergrowthemerges,PondandothersbelievetheFederalReservewillseektoavoidrepeatingtheJapanesestaga-

tionerrorsoraisingratestoosooninrecovery.TheFedviewsinationasymmetrically,heexplains.Theytendto

beverypatientwheninationisabovetheirtargetandveryaggressivewheninationisrunningbelowtheirtarget.

NOT SO GREAT BRITAIN

AsintheUnitedStates,unemploymentisatopindicatorbeingwain theUnitedKingdom.While thecountrysGDPgrowth at a

0.5percenthaslaggedbehindtheUnitedStates,it comparestherestoEurope,saysPhilTyson,headostrategyorintere

productsatMFGlobal,U.K.Unortunately,theUnitedKingdommtakeaturnortheworsebeoreitgetsbetterasthemassiv

squeezethemostsevereintheG-7startstokickin,hewarnPublicsectorjobcutswillensurethatunemploymentstar

ingagainwhich willmaintainsignifcant downward pressure

growth,Tysonsays.AddingtotheconcernsovertheU.K.recoveryistheactth

sumer indebtedness, at $2.3 trillion (1.1 trillion), exceeds wnationproducesinayear,meaningthereisunlikelytobeaburdividualspendingtoinuselieintotheeconomy.Overall,there

benomonetarytighteningasGDPgrowthwillbeheldto1percenpercentor2010and2011.MorelikelytocomeromtheBankoEng

beratecutstotryfrmingtheBritisheconomysunsteadylegs,Tyso

AILING EUROPE

AddingtotheUnitedKingdomswoesistheactthataalteringzonerecoverywillaectU.K.exports,pressuringbusinessesther

more.FortheEuropeanUnionitsel,whilejoblessnessandconspendingare actorsin predicting rates,thereremainmoret

someconcernsoverthehealthoEuropesfnancialinstitutions

Recentindustrialdatahasgiventheimpressionthatrecoversectorremainsontrack,Tysonsays.Thedata,however,maskg

divergencieswithintheregionasawholewhereperipheralecoarestilllaggingbadlybehind.

Strongexporters,likeGermany,shouldbeneftromaweake

Butother, less robustEuropean economies will fndanyexporhammereddownbystrictausteritymeasures,theeectsowhicha

startingtobeseeninbusinessandconsumeractivity.FortheEurUnionasawhole,thismeansinationwillhoverclosetozeroort

seeableuturewhiletheEuropeanCentralBankcontinuestotryandglewithserioussovereignriskandbankingconcernswhileavoidiveryrealriskoslippingbackintorecession.Atbest,lookortheEur

topostGDPgrowtho1percentin2010whileweakeningagainne

Tysonpredicts.Theoverallglobalweaknessurtherincreasesthelikthatrateswillremainloworsometime,saysJPMorgansBelton.

AgoodruleothumbisthatwhateveryoulostinGDPduricession,thefrstyearoutGDPgrowstwicethat.

Thathasnothappenedinanyothemajoreconomiesthwiththegrowthperhapsone-thirdowhatwouldhavebeenexp

heexplains.Thereistrend-likegrowth,butitisnotenoughtoremovet

nomicslack,Beltonsays.Andthat,itappears,willsupportlowratesorsometime.

If consumers have more money in their pocket they are likely to spend

With the boost in GDP from inventories likely to fade going forward,

you really need consumer spending to take over.

Michael Pond, BarclaysCapital


41/64


42/64

42 CMEGROUPMAGAZINE


43/64FALL2010


44/64

44 CMEGROUPMAGAZINE

GUEST COLUMN

WHAT IS STATE CAPITALISM?

Statecapitalism isa system inwhich thestate dominates markets, primarily forpolitical gain. But the division betweenstate-capitalist and free-market countriesisnotalwaysclear.Thereisnoironcurtainseparatingthetwosidesneatlyintooppos-ingcamps.EverycountryonEarthfeaturesbothdirectgovernmentinvolvementinreg-ulatingeconomicactivityandsomemarketexchange that exists beyond the statesreach. No countrys economy is eitherpurelystatecapitalistorpurelyfree-marketdriven,andthedegreeofgovernmentinter-ventionwithineachcountryuctuatesovertime.Thatsaid,therearecrucialdifferencesamongcountriesinhowtheirgovernmentsregulate commercial activity and in theirpowertoextendtheirinuence.

The illustration above will help put

state capitalism in context. It representswhat we might call the entire marketspectrum.Ateachendaretheideologicalextremesofastatesroleinaneconomy.Onthefarleftisutopiancommunism,withabsolutelyno free-market activity. It is agameinwhichtherefereeshaveabsolutecontrol ofevery playerseverymove.Theextremehasnever existed,because eveninthemosttightlycontrolledstate,blackmarketsgeneratesupplytomeetdemand.On the farright isutopian libertarianism,whichsomecallanarcho-capitalism.Atthisextreme,thereisnogovernmentandnootherauthoritythatcanmanage,regulate

orinterfereinanywaywiththeoperationofmarkets.Itisagamewithnoreferee.

THE STATE-CAPITALIST CAMP

There are two fundamental differencesbetweenfree-marketandstatecapitalism.First,policymakersdonotembracestatecapitalismasatemporaryseriesofstepsmeanttorebuildashatteredeconomyortojump-startaneconomyoutofrecession.

It is a strategic long-term policy cSecond,statecapitalistsseemarkemarilyasatoolthatservesnationaests,oratleastthoseoftherulingerather than as an engine for oppofor the individual. State capitalistmarketstoextendtheirownpoliticeconomic leverage both within sandontheinternationalstage.

Statecapitalismisnotanideolonot simply communism byanotheroranupdatedformofcentral planembraces capitalism,but for itsowpose.Manyofitspractitionerscamewithinauthoritarianpoliticalandecosystems, where governance is theriskmanagement.Insuchasystem,is an all-or-nothing proposition, anoutcomes of all the various politiceconomic gamesthey play candete

theirverysurvival.Facedwithsuchaitisbesttocontrolboththerefereeastrongestplayers.

Thereisnosinglemodelofstatecism, though its leading practitionersawell-developedsenseofriskaversionoaccidentthatthe twomost interally inuential ofthemareChinaansia,countriesthathave onlyrecentlcommunismandembracedmarkets.chaoslongpredatescommunism inand a tradition of secrecy and centcontrolhasshapedRussianpoliticalcenturies.Itislittlewonder,then,thatgovernments inBeijingandMoscow

decidetowelcometheincreasinglyfrofideas,information,people,money,and services from beyond their bthey would try their best to controprocesses andtocarefullymicromtherisks theycreate.This organicreshipbetweenstatecapitalismandautisalsovisiblewithintheArabmonarcthe Persian Gulf, where personal, pand commercial interests are tightly

State capitalism

is not an ideology.It is not simply

communism by

another name

or an updated orm

o central planning.

It embraces

capitalism, but or

its own purpose.


45/64

Even i state capitalism

is not around a century

rom now, the fnancial crisisand the global recession

have ensured that it will

enjoy many more years o

robust health.

FALL2010

wovenwithinroyalfamilies.Itisalsovisibleinenergy-richauthoritarianstateslikeIran,Venezuelaandothers.

THE CHALLENGE

Thoughstatecapitalismschallengetofree

marketswillnotgeneratethedramaoftheBerlinairliftor theCubanmissilecrisis, itcancompromisea countrys security andthe future of the global economy. Withmercantilism a thing ofthe past,fewnowdoubt that commerce can generate newwealthandexpandmorethanoneeconomyatatime.TheendoftheColdWarandthegrowth of emerging-market states likeChina,India,Russia,Brazilandothershavecreated new opportunities for preciselythat kindof mutually protableexchange.Thewillingnessofpoliticians ina growingnumberofdevelopingstatestogambleongreater openness to foreigntrade and in-vestmenthasbroughthundredsofmillionsofnewplayersintotheglobaleconomy.

TheWesternnancialcrisisandglobalrecession have left champions of free-market capitalism facing an increasinglyskepticalinternationalaudience.Countrieslike state-capitalistChina (andthosewitha relatively smaller stake in internationaltrade, like India and Egypt) have taken amuch less severe hit from the slowdownthan free-market powers in America andEurope.Withtheriseoftherest,theseandother developingstateshavecut intoU.S.political,economicandculturalhegemony

overthepastseveralyears,andWashingtonhasseenitsgreat-poweradvantagesbegintoshrink,atleastonarelativebasis.

Ifalltheseemergingpowersembracefree-market capitalism, America mightstill hold a somewhat smaller piece of amuch bigger pie.The risk for theUnitedStatesandforfree-marketdemocraciesgenerally is that distortions createdbystatecapitalismwillensurethatthepieis

notexpanding quickly enough toaccom-modateallthenewmouthsitwillsoonbeexpected to feed. That will threaten notjust standards of living, but eventuallyperhaps thesecurity of theworlds free-marketdemocracies.

Evenifstatecapitalismisnotaroundacentury from now, thenancial crisis andthe global recessionhave ensured that itwillenjoymanymoreyearsofrobusthealth.

American-style free-market capitalismand the idea of globalization have takenplentyofblameforthemeltdown.Develop-

ingstatesthatopenedthemselvestotradeand foreign investment took an especiallytoughhit,whilethoselikeIndia,PolandandEgypt that are less dependent on cross-

bordernancialowsweatheredthestormwithfewerlastingproblems.Outside of these exceptions, interna-

tional investment in the developing worldhas slowed considerably during the crisis.In2008,emergingmarketstookin$461bil-lioninnetpositivecapitalinows.Asofthiswriting,2009 gureswere expectedto fallto$165billion.AFebruary2009WorldBankreport estimated that 53million people in

Free-market

economies

Command

economies

Utopian

communism

Utopian

libertarianism

MARKET SPECTRUM

State capitalism Free-market capitalism

emerging-marketcountrieswouldslidinto poverty over the course of thaTradebarriershaverisen,protectioniintensied,andlargenumbersofimmworkershavereturnedtotheirhometries.Meanwhile,statecapitalists,par

lyinChina,continuedtoinvest.In200example,nationaloilandgascompanemerging-market-based sovereignfundsaccountedforarecord15percglobalmergers and acquisitionsandthe10largestassetdeals.

ThereismorethanonemodelomarketcapitalismandAmericansaropeansoftenargueovertherelativeoftheirownversions.TheU.S./Anglomodel grew frommistrust of any sthatgivesgovernmenttoomuchpowEuropean social-democratic modelmoreonthestateasguardianoftheof the individual. Relatively speakfavorssafeguardsforworkersoverptions for employers.Thiscan slow gratesovertime,butitprovidesawidcialsafetynetwhenthingsgowrong.

Different as they are, the twomshare a core assumption: that thepsector,notthestate,mustbethepengineofeconomicexpansionif grotobestrongandsustainable.Yettheence between freemarket capitalisstatecapitalismisafundamentalonformer recognizes that governmenhelpenablegrowth,whilethelatterathatgovernment-managedgrowthc

therempowergovernment.For all the reasons outlined,capitalism limits the global free msystemsproductivepotential.Thatit is important that thosewho belfree-market capitalism continue toticewhattheypreach.


46/64

KAREL JANECEK

Chie Executive Of

46 CMEGROUPMAGAZINE


47/64FALL2010


48/64

Founded in 1994 by Karel Janecek, RSJ was launched as a small stock trad-

ing operation in Plze, Czech Republic, a town better known or its beer.

By 2000, the frm was based in Prague and began trading utures in Europe,

and in 2004 making markets. In 2008, Janeceks relatively small group be-

came a market maker at CME Group in Eurodollar utures and the E-mini

S&P 500 index utures.

Today the frm is the largest proprietary trading frm in the Czech Re-

public and ranks third among CME Group market participants in terms o

volume traded on the exchange. It also is among the top three in Eurodollar

utures volume. Over the past year, RSJ reported that its trading volumeon CME Group had more than doubled, rom 11.7 million contracts in the

third quarter 2009, to 26.9 million contracts in the second quarter 2010.

We started trading in the derivatives markets, doing carry trades on the

yield curve through short-term interest rates on a trading program I cre-

ated, says Janecek, who also serves on the aculty o Charles University in

Prague, where he teaches a graduate-level course in fnancial mathematics.

The system is still working today.

In an example o how global fnancial markets have evolved in recent

years, RSJs story illustrates just how a conuence o technology, inra-

structure and talent is shaping the utures industry. In 2001 and 2002, RSJ

perormed its trading manually on other markets. But that was when elec-

tronic trading was still in its relative inancy.

We were lucky. Today, wed be quickly out o business, Janecek says. Then

we began to develop sotware or automated trading or market making.

RSJ adapted to the new high-speed markets and, in 2007, it became a ull-

equity member o CME and began making markets in Eurodollar utures the

ollowing year. The designation gave the frm better access to CME Group

products and opened the door to trade much more volume.

Andrew Chart, head o the proessional trading group business in Europe

and the Middle East at Newedge Group in London, says frms like RSJ have

been brought into the mainstream derivatives space, as opposed to remain-

ing in their own domestic markets, by the continuous upgrades to trading

engines and networks by exchanges, as well as the ongoing telecommunica-

tions inrastructure improvements within some o these countries.

Years ago, frms in that region werent well known, werent well regulated

and it was also difcult or them to get credit lines and be onboard with West-

ern institutions, says Chart, who has been working in Central and Eastern Eu-

ropean regions or Newedge or 11 years. Thats changed, and the more global

the business has become, the more recognized these frms have become.Chart adds that the technology improvements and incentive programs

or proprietary trading frms and hedge unds by CME Group have also

played a large part in bringing in frms like RSJ.

When we speak about Eastern Europe, telecommunications and tech-

nology are ever-evolving, Chart says. And that makes the markets more

accessible as telecoms improved. But or frms in the region, its been an

evolution, not a revolution.

FINDING TALENT

RSJs trading models are all mathematically-based and developed in-hous

The frm outsources a air bit o its operations to stay lean and ocused o

trading and making markets. Janecek says the talent pool is deep in th

Czech Republic, where virtually all o its mathematicians, programmer

and traders who monitor the markets, come rom. Most o his 44 sta

members have masters degrees or doctorates in mathematics, physics or i

computer programming.

Very important skills sets or us are frst mathematicians, developers an

programmers who understand mathematics, Janecek says. Almost all o thpeople we hire are recent graduates rom college, so we dont actually nee

experienced traders. We need people to learn the way our systems work.

RSJ sees no need to open ofces in other locations around the world. In

stead the frm uses co-location services in Chicago, London and Frankur

Despite its singular ocus on algorithmic trading, Janecek says that spee

is not the main element to its trading philosophy. Instead, the frms fr

priority is on building trading models that fnd various opportunities th

are not obvious within the markets they trade.

Technology is important and we dont want to be too slow, Janecek say

But it is not so important that we have to be frst in line, or the astest, becau

our trading is based on very complicated modeling. What is most importan

then is the modeling, and then using the technology such as co-location.

Janecek says speed has been more important in the stock market whe

multiple exchanges compete or volume on the same listings. But in u

tures, where contracts are oten exclusive to that exchange, strategy is kealong with solid risk management methods.

Historically, what helped us get where we are and our biggest competitiv

advantage, was very well done risk management, Janecek says. We trad

intra-day. And at each moment, all our systems know what our risk is. An

they know how to behave accordingly, based on current open positions.

RSJ does not plan to stand pat with its operations or its ocus on fnanci

markets. The frm is looking to add commodity markets as well, with a

early ocus on energies. It is also looking at Asian markets and is conside

ing a push into equity markets in a ew years.

As RSJ continues to look at the global market, Prague looks like a pret

good base to continue working rom.

The level o talent is similar everywhere, Janecek says. And we do hav

very talented, high quality people here.

Newedges Chart says that RSJ serves as a good example o the potentiaor the Central and Eastern European region.

When people read and hear about RSJ and the successes they hav

had, its an advertisement to other smart intellects who might want t

write their own algorithm, Chart says. There are going to be local peo

ple who are born and educated within Central and Eastern Europe, wh

will look toward these frms like RSJ, who act as their leaders or beacon

to ollow.

48 CMEGROUPMAGAZINE

CUSTOMER CONNECTIONS


49/64

www.dubaimerc.com

Time to settlesome differences

Bringing fair and transparent energy trading

to the Middle East and beyond


50/64


51/64


52/64


PARTNER TIES

The KOSPI 200 index contracts are not just any derivatives in Korea,

they are a cultural phenomenon.

Few products combine widespread retail liquidity with institu-

tional interest to such a successful extent. Korea Exchanges (KRX)

KOSPI 200 futures contract was among the leading stock index futures

contracts in the world in 2009 with a total volume of more than

87 million contracts traded, up 28 percent from a year earlier, accordingto Futures Industry Association gures.

Its counterpart, the KOSPI 200 option, has been the most actively

traded derivatives product in the world for years. Together, the KOSPI 200

contracts are among the most dynamic index futures and options con-

tracts in the industry, something that Koreans are rightfully mindful of.

The KOSPI 200 index was rst published by the then Korea Stock

Exchange in 1994. Kospi futures was launched in 1996 with options the

following year. The index is indicative of the top 200 stocks at KRX.

The product is like cultural heritage, which Koreans should be proud

of, says Kevin Lee, managing director of Newedges Korean business.

This success comes from an exchange that has been in exis-

tence for just ve years. KRX was formed in January 2005 by the

consolidation of the Korea Stock Exchange, Korea Futures Exchange

and Korean Securities Dealers Automated Quotations. In 2010,

Sun-Bong Kim, the former president of Kiwoom Securities, became

KRXs chairman and chief executive ofcer.

Headquartered in Busan, KRX is the worlds largest exchange,

based on 2009 volume. Its business is split about 50/50, listed deriva-

tives versus equities. KRXs success reects a regional trend in which

Asian listed derivatives volume grew nearly 25 percent in 2009 while

volume at European and North American exchanges fell.

The KOSPI 200 is far from KRXs only success story. The exchange

also has thriving markets for currency futures, Korean Treasury bond

futures as well as single-stock futures.

The KOSPI 200 products have been growing since the futures

contract was rst launched by the Korea Stock Exchange in 1996,

followed in 1997 by the options product. In recent years, the exchange

has been working with a variety of Asian and global exchanges such as

CME Group on technology, products and distribution networks.

Average monthly trading volume for the KOSPI 200 futures in the rst

half of 2010 totaled well over 7 million contracts (see chart). Given the

larger size of the futures contract, that equates to nearly 40 million

KOSPI 200 options in cash value.

MARKET ACCESS

The KOSPI 200 success story is often painted as one driven by an

unusual level of retail interest and indeed retail clearly has a big part

to play. KRX gures show about 30 percent of total volume in KOSPI

200 futures contracts comes from retail market participants with the

options-specic market share likely to be somewhat higher.

But KRX would like to see more international trading from insti-

tutional players. Last year, KRX says that offshore rms represented

more than 33 percent of trading volume in the KOSPI 200 f

and options. Analysts say there are compelling reasons for w

that exposure. Seok Yun, head of research at the Korean opera

Credit Suisse, expects corporate protability to remain high a

market to remain strong well into 2011.

The U.S. economy continues to steadily improve and com

prices have been stable, which historically have turned out to be ke

factors for South Korean exporters, Yun says.

To attract more international participation, KRX partnere

CME Group to offer KOSPI 200 futures, after Korean hours, on th

Globex electronic trading platform. Launched in November 2009, e

KRX clearing members are able to access after-hours CME Globeing in the contract via the Korean exchanges Unied System for

Trading. The partnership now provides a global distribution netw

the KOSPI 200 futures as well as virtual 24-hour access to the co

CME Group and KRX are also planning to add a two-way

routing system, subject to regulatory approvals. A similar agre

between CME Group and BM&FBOVESPA helped boost intern

volume on the Brazilian market substantially and today accou

more than 25 percent of trading on its stock index futures.

In July 2010, Credit Suisse and Merrill Lynch began offer

cess to after-hours KOSPI 200 futures on CME Globex while

Newedge Group, joined them in August. Another ve Korean rm

rently offer or are planning to offer access to CME Globex to custo

TAX ISSUES

However, the future is not cloudless for the Korean futures and obusiness. Following a proposal from the ruling Grand National P

August 2009, legislators have agreed to impose a tax on deriv

including futures and options, from 2013 with the basic rate to

at 0.01 percent. While the bill still requires approval from the N

Assemblys Legislation and Judiciary Committee before taking

traders are concerned.

Slapping a tax on futures and options trading would in

costs, forcing many investors to leave the market and driving

trading volume, argues Lee.

1

2

3

4

5

6

7

8

9

10

J

an07

A

pr07

Jul07

O

ct07

J

an08

A

pr08

Jul08

O

ct08

J

an09

A

pr09

Jul09

O

ct09

J

an10

The exchange also has thriving

markets for currency futures, Korean

Treasury bond futures as well

as single-stock futures

KOSPI 200 INDEX MONTHLY VOLUME

IN MILLIONS OF CONTRACTS TRADED


53/64


54/64


55/64


56/64


57/64


58/64


59/64


60/64

CURRENT PULSE


The Story of InnovationThe story of CME Group is now on dis

the CME Group headquarters on the ex

oor corridor, waiting area and conf

rooms. The historical exhibit depicts t

lective experience of predecessor instit

The exhibit illustrates the role

Group has played in the growth of

commerce, innovation, technology a

global economy for more than a centu

it displays the people and products in

with this story using the companys ex

archives. Brochures illustrating the e

imagery and story are also available

public visitor center.

Green LightGreen Exchange LLC, received regulatory approval as stand-alone market in July 20

Contracts on emissions allowances and credits in CO2, NO

X, and SO

2will be transferred

the Green Exchange but will continue to be listed for trading and clearing by NYMEX u

the process is complete. Throughout the transfer process, the Green Exchange will c

tinue to develop additional products for launch

cmefall2010low

Documents

Transcript of cmefall2010low