Opening remarks of Walt Lukken, President and CEO of FIA, at the FIA Expo 2022 conference in Chicago. As prepared for delivery.
Welcome to FIA Expo, and welcome back to the Sheraton. For us old-timers, this is FIA’s first event at this location since 1999.
To put that in perspective, in 1999:
- ICE was only an idea in Jeff Sprecher’s head
- Don Wilson was still a floor trader
- Gary Gensler was at the US Treasury and supported de-regulating the derivatives markets; and
- The number one issue for our industry was…wait for it…Y2K
Boy, have times changed. This year also marks the 50th anniversary of the birth of financial futures, and the start of our modern derivatives markets. We will commemorate this anniversary with a video presentation and some special guests during our Taste of Expo in the Exhibit Hall later today. Thanks to John Lothian for helping produce this video. I hope you can join us this afternoon to celebrate this milestone.
Chicago has a rich and colorful history and has played a key role in the advancement of our markets. The exchanges and traders in this city have always been contrarians -- challenging assumptions and taking risks on new ideas. FIA embraces this innovation. It keeps competitive spirits high and makes our markets stronger.
And the latest FIA data shows the fruits of this kind of innovation. Global trading of futures and options is up 36% this year, putting us on pace for a fifth consecutive record. US futures volumes are a healthy part of that growth, up 21% over last year.
Why is this growth happening? It’s the simple truth that when uncertainty is all around us, risk management and price discovery are more important than ever. That’s why our markets exist. And that's why our markets will be the engine of economic recovery ahead. When the global economy faces serious pain, our markets respond. That's as true today as it was back in 2007, or even 1987.
Global derivatives markets provide a crucial feedback mechanism. Our industry ensures that the private sector can allocate capital efficiently and expeditiously. This ultimately helps the global economy move past the challenges we face.
Back in 2007, when oil was $147 a barrel, the private sector didn't need a think tank or five-year plan to formulate a response. Businesses just took prices from our markets, analyzed new opportunities, and put their capital to work. It’s that simple. And Tesla was born. The fracking industry took off. And the US went from the largest net importer of energy to one of the largest energy exporters on the planet. It was our markets that enabled those changes.
Now, I’m not insensitive to the painful consequences of high prices in the real economy. But stepping back, I also know that our markets are a powerful force that moves society to a better place. This morning, I’d like to highlight a few areas of focus for the coming year.
Market structure
When it comes to our markets, digital assets are always a hot topic. And recently, that hasn't been for the best reasons. It was only one year ago, here at Expo, that we were first introduced to FTX’s Sam Bankman-Fried and his new ideas on financial market structure. Little did we know that Sam and FTX would be the talk of Expo again, this time because of their catastrophic implosion. Details are still emerging, and serious questions will need to be answered. That said, today I want to talk about what we do know.
"We will never compromise on the core principles of customer protection, market integrity and risk management. That’s a promise, from FIA to all of its member firms,"
I know that futures markets, while not perfect, have weathered many financial storms over the years. That's because of their foundation of sound regulation, risk management and customer protection.
Listed derivatives markets didn’t just survive the financial crisis of 2008. They offered a model on which regulators sought to rebuild confidence and resilience. Don’t be surprised if history repeats itself.
This crisis is likely to lead policymakers to regulate spot crypto products the way our futures markets are regulated. We all support responsible innovation and fair competition. But those qualifiers—responsible and fair—are critical to how our industry evolves. Our markets are resilient because our trading and clearing system is truly a system—a system of independent controls that compartmentalize functions and socialize risk.
Exchanges, CCPs, intermediaries and end-users serve as important checks on one another, each with their own responsibilities and roles. Whether you are a crypto firm or an incumbent exchange, models that collapse these functions into one organization must be approached with appropriate caution.
By removing these independent checks, conflicts of interest inevitably arise, particularly for those with self-regulatory responsibilities. And risk may be further concentrated as we saw last week. That is why FIA believes independent intermediaries should continue to play a vital role in our clearing system.
As agents for their clients, clearing members protect customer funds and block illicit activity. FCMs are the front line of defense in a customer default, putting their entire balance sheet behind every trade. And importantly, their capital backstops the entire clearing system.
According to FIA’s CCP Tracker, if you eliminated clearing firms from the clearing system, you would remove $67 billion dollars from the clearinghouse default funds and reduce these backstops by 96%.
In short, disintermediation has its costs. And they are not insignificant.
Our industry must be open to improvements, and crypto firms have brought fresh ideas and renewed passion to our markets. But significant changes in any complex system, like our markets, deserve a deliberative and thoughtful discussion.
To me, the way forward should be the same—whether you're talking about the financial futures products that launched 50 years ago in Chicago or the micro ether futures that launched this past March. That is: Same activity, same risk, same regulation.
If a certain activity generates the same risk to a customer or to the marketplace, we should have a level playing field on how that activity is regulated. FIA is eager to engage with the industry and the global regulatory community in areas of market structure innovation.
But as recent news illustrates, we must be thoughtful and measured. And we will never compromise on the core principles of customer protection, market integrity and risk management. That’s a promise, from FIA to all of its member firms.
Commodities and climate
Another place where our markets are evolving and growing is in commodity markets and climate-related products. In the past, some folks have separated these two areas. But last year has proven that traditional commodity markets and sustainable finance are interrelated.
The current energy crisis has created real hardship for businesses and consumers, especially in Europe. This fall, FIA and its board visited Brussels and Paris to meet with policymakers and discuss how our markets will assist with these long-term issues. We emphasized our experience in keeping markets orderly and urged EU policymakers to avoid artificial price caps or market closures that could harm price discovery.
Policymakers in Europe seemed to be listening. But the politics of high prices cause even rational people to take drastic measures. The European Union is, in many ways, on the cutting edge of climate and commodity markets. Emission markets in Europe, which were established in 2005, are the most liquid and mature in the world. Along with traditional energy markets, these emissions markets will help the EU navigate its transition over the coming years – that is, if they are allowed to operate as they should.
During this time of transition and disruption, the signals our markets send to the real economy are more important than ever.
Event markets
Another area of innovation making headlines this year is event markets.
The CFTC has become more active in this space, revoking no-action letters and seeking public comment on new event contracts. This has highlighted the challenges these products face.
To quote the Chairman of the CFTC: “Event markets are rapidly evolving and growing, presenting a host of difficult policy and legal questions including: What public purpose is served in the oversight of these markets and what differentiates these markets from pure gambling outside the CFTC’s jurisdiction?"
By the way, that is not a quote from our current Chair, Russ Behnam. Rather, it’s one that I made in 2008 as Acting Chair of the CFTC when the agency first began to study these markets in earnest. Clearly, these prediction markets have been around for a while. But society’s obsession with smart devices and gamification has brought these markets back into the limelight.
The philosophical question at hand is not whether the CFTC can regulate these contracts. They certainly have the tools and flexible legal authority to do so. But should they regulate these contracts, when their economic purpose is oftentimes unclear?
I am very interested in how the CFTC may approach this area because they are going to play a key role in how these markets develop further.
Other jurisdictions, including the UK and the EU, have instituted bans on binary options. That means, for better or worse, US regulators are poised to set a precedent in this area. It won’t be an easy task. But it’s a worthy one. Because, as FIA said in a recent public comment on event markets, “Only through clear rules can innovative ideas flourish.”
And that’s something worth remembering, no matter what the marketplace.
Closing
As I hope you agree, there's a lot to be excited about right now. New products are being listed, and dynamic new competitors have emerged. Cleared derivatives markets are thriving and experiencing record volumes as a result.
But as we gather in Chicago, a city with deep roots in our markets, it's worth remembering why the futures markets began to innovate beyond agriculture in the first place. After all, financial futures were born fifty years ago under the same foundational framework of price discovery and risk management as we use today.
We don’t need to reinvent the wheel. We just need to think of new places to go. That's what's so inspiring about this industry. What we do matters, every day.
It matters to European consumers who worry about heating their homes. It matters to young Chicagoans trying to get their first mortgage. It matters to policymakers assessing the risks of extreme weather to their citizens.
FIA's members come from all around the globe. We are a big and sometimes messy family, and we don’t always agree. But we do believe to our core in the power of our markets, and the values that underlie them.
We all support open, transparent and competitive markets. We all believe in the societal benefits of risk management and price discovery. And most importantly we all support protecting customers and end users who rely on our markets.
So I’ll close by thanking all of you for your dedication in service of this mission. I want to thank you for being members of FIA and taking time out of your busy schedule to gather with us at Expo. We appreciate the trust you’ve placed in us.
I also want to acknowledge students from the Greenwood Project who are here today. Greenwood connects Black and LatinX students with internships in the financial services industry, and FIA is a proud supporter of this incredible organization. You can learn more about Greenwood and how to get involved in a special fireside chat this afternoon.
Last, but not least, thanks to our sponsors and exhibitors. This is a world-class event because of you. Please offer them a round of applause.
We have a great lineup of speakers again this year, as well as our seventh annual Innovators Pavilion.
There's a lot in store over the next two days. To get us started, I'd like to introduce our first speaker, CFTC Chairman Russ Behnam.
