Opening remarks of Walt Lukken, President and CEO of FIA, at the International Derivatives Expo (IDX) in London on 18 June 2024. As prepared for delivery.
Welcome to the International Derivatives Expo or what we affectionately call IDX. If you can believe it, this is our 16th year of hosting this fantastic conference!
IDX brings together the entirety of the global derivatives markets to discuss developments and challenges facing this industry, with a special focus on Europe. It's also wonderful to be here in London, one of the greatest cities in the world!
As we gather here at IDX, we are going through an incredibly uncertain time. 2024 will see half the world heading to the polls in what is set to be a historic election year.
Two weeks ago, the EU elections saw the conservatives and centre-right groups gain ground, leading French President Macron to call for a snap election later this summer. Here in the UK, the Labour party is expected to sweep into power when elections are held on 4 July. And we have that boring election in the US where Americans will elect an unpopular President in November, no matter who is elected.
These political shifts will undoubtedly increase volatility and uncertainty in global affairs and markets. With the conflicts in Ukraine and Gaza, as well as growing western tensions with China and Iran, it is likely that markets will reflect this uncertainty for the foreseeable future.
But despite these constant negative headlines, there are many reasons to be optimistic about our industry. Today I want to talk about some of these good news stories that are happening right now in our markets.
Keep on Growing
Take volumes and growth. Last year the number of futures and options traded on exchanges worldwide hit a record level of 137 billion contracts.
Last year’s trading volume was 64% higher than the year before, and more than double the total number of contracts that traded in 2021. Our markets today trade more contracts in one month than our industry did in an entire year 20 years ago!
We may not like the heightened political tensions right now, but our markets were built for this moment. During these times of volatility, our products help investors and institutions manage risk and reduce the economic fallout from this turmoil.
All around the world – whether in London, Paris, New York, Chicago, Singapore or developing regions like India, Brazil, and Dubai – our story is one of global growth.
One traditional asset class that is thriving is energy. Two years ago, Europe was reeling from supply shocks brought on by the Russian invasion of Ukraine. Energy prices surged to record highs.
Fast forward to today and energy markets have adjusted. Europeans have found new sources of supply, invested in renewable energy, and become more energy efficient. As a result, energy prices have come down.
This was not because of price controls or government regulation. It was because our markets sent powerful pricing signals that changed behavior.
Today Europeans use 20% less natural gas than they did in 2021. And for the first time in 2023, electricity generated from renewables overtook electricity derived from fossil fuels in the EU.
Pricing signals from our markets helped drive this change in supply and demand for the better. Now that’s powerful and worth bragging about.
Ain't No Mountain High Enough
A second reason to be optimistic about our industry is heightened competition. I don’t know about you, but this feels like the most competitive environment our industry has experienced in a couple of decades.
We have existing and startup exchanges challenging each other with novel ideas and new models. We have transformative technologies that could revolutionize how markets work. And we have innovative products that promise to drive growth well into the future.
Here in Europe, there are fierce battles among exchanges in the equity options space, the power and gas markets and the ESTRs futures markets.
In the US, the Treasury and repo clearing mandate has lit a fire in the interest rate markets. FICC, CME, ICE, LCH and FMX are all putting forward offerings to improve this $27 trillion Treasury market. Competition drives us to do better, to modernize and to become more cost efficient.
That is why FIA champions responsible innovation and fair competition through initiatives like our Expo Innovators Pavilion and the awarding of an annual Innovator of the Year to a deserving startup.
We all benefit from this enhanced competitive environment. And that is why I remain optimistic about our industry right now.
Blinded Me with Science
A third reason I’m feeling positive is the transformative technologies that are beginning to impact our markets for the better. One such promising technology is tokenization. It has the potential to revolutionize how our markets work by digitizing the settlement of trades.
Fifteen years ago, the G20 nations put forward our markets as a model of reform after the financial crisis. In doing so, they cited the importance of clearing – the process that provides our markets a safe and transparent way for trades to settle. This is ensured through the daily collection of margin and collateral to guard against default.
This settlement process works well but has room for modernization. The workflow of clearing and margining requires a coordinated ballet of market participants working together to make sure the right money and assets are moved to the right account on the right day.
But what happens when trading moves to 24/7 beyond banking hours? What happens when a settlement cycle falls on a bank holiday and margin cannot be collected from clients? If clearing and settlement cannot run, risk builds in the system where it is not expected.
Are there ways to simplify and modernize this process to avoid these risk anomalies?
One solution may be tokenization. Tokenizing cash and collateral would allow us to move margin and settle trades faster and safer, lowering the risk of defaults disrupting our markets.
This would allow us to settle trades on public holidays or during extended trading hours, making our markets more efficient and safer.
The good news is there is a lot of work being done on this concept and it’s worth our industry paying close attention. Recent public-private initiatives by central banks, regulators and market participants show great promise for developing standards and approaches for tokenizing assets.
These are exciting developments that our industry must embrace. This is another reason we should be optimistic about our future.
Crossroads
Clearly, not everything is as doom and gloom as it seems. There is a real opportunity to continue to grow our markets and make them more competitive in Europe and beyond.
This is also an opportune time to take stock and examine the goal of developing a strengthened Capital Markets Union in the EU. FIA and its members strongly support developing more choices for capital formation and investment wherever clients need funding for growth, including the EU.
That said, we find ourselves at a crossroads. The further development of the CMU requires many ingredients, including a sound and proportional regulatory framework, a harmonised insolvency structure, and, importantly, strong incentives for citizens and institutions to want to invest their savings in European companies.
Unfortunately, many companies find doing business in the EU complicated and burdensome.
Today FIA and Acuiti are releasing a survey on the state of the European markets, which speaks to this point.
When asked, 53% of market participants believe that regulatory burdens are the biggest challenge to growing the derivatives business over the next five years.
Forty percent of respondents do not believe that EU regulations are proportionate to the risks of their activity.
The survey also shows that more companies are looking outside of Europe, rather than internally, for client growth of their business.
Such concerns around balkanization are also echoed by others within the EU, including prominent European political leaders. Several have noted that entrepreneurs and businesses face significant red tape, fragmentation and costs due to overlapping regulations and administrative complexities in the EU.
Moving to a more simple, centralized and proportional set of rules could incentivize investors to unlock the $33 trillion of savings currently sitting in EU deposits.
Without this untapped investment, the EU economy is at risk of falling further behind in a fiercely competitive world. But if these funds can be put to productive use, it will fuel European growth and offer significant opportunities for our industry on the continent.
The EU plans to prioritize the completion of a CMU once the new Commission and Parliament are formed. And if they can get this right, with a balanced approach of incentives and fit-for-purpose regulations, the EU has a real shot of strengthening its capital markets and creating a culture of investing. This would be a boon for our global economy and markets.
This is the End
In closing, I want to reiterate my optimism for this industry. Afterall, this is the time of year for renewal and hope as many young students from around the world graduate from schools and universities. My daughter is one of those graduates, so I have been listening to many speeches advising students on the keys to fulfilment, success and happiness in life.
A common theme is the importance of giving back to others and thinking beyond yourself to serve a greater cause.
When I think about my own happiness, it is when I feel a part of a greater good—when I have worked with smart people who earnestly are trying to help others and build something meaningful.
I witness this all the time in our industry. One thing I love about our markets is we are always ready to roll up our sleeves when it matters to help the community.
- Like seeing a backlog in trades at the start of Covid and our membership creating the standards body DMIST to address it.
- Or facing a major cyber-attack last year and industry volunteers coming together to overcome the incident and prepare for the next attack.
- Or even seeing injustice and a lack of opportunities among our youth and individuals from our community deciding to get involved with Futures for Kids and its Gala to raise money for this important cause.
- Specifically, I want to give a shout-out to one such individual, SGX’s Rama Pillai. Rama decided to take on the Kilt Challenge for Futures for Kids this year, more than doubling the record by raising £60,000 pounds for this charity.
These are the human good news stories of the futures industry that I see all the time. It comes in the form of selfless acts of volunteers who give back, even when no one is looking.
So, when you feel overwhelmed by the negative news that bombards us all day long, I challenge you to not retreat, but to combat it by giving back. Put positivity back into the world.
It is this basic human interaction that connects us all and brings us happiness and joy. And I’m humbled to be associated with an industry that comes together in times of troubles to solve problems for the greater good. That is the greatest good news story of them all.
So, thank you for being members of FIA and attending this conference. You help make the magic happen by being here.
