Sandor talks about inventing markets

Blog first appeared in DanCollinsReport on Aug. 6, 2013

He then pointed out how the imminent demise of the Bretton Woods agreement, which basically fixed currencies and interest rates from 1945 to 1970, would provide an opportunity to create markets  for interest rate and stock index futures and of course currencies.

Finally, how the problem of acid rain on the East Coast led for the need to create emissions trading.

Obviously he was involved intimately in the last two.

“When you see a structural thing like that what do you do to capitalize on it? he asked. Sandor said you need four elements: “1) Is legislative, you have to have legislation that clearly defines the commodity that you will trade; 2)regulation; 3) you have to build the institution and collateralize it and  4) you have to design the contract.

He pointed out that as CBOT chief economist he worked with counsel, notably Philip McBride Johnson (note to John Lothian, try and book Phil Johnson for next event, his contributions to the industry have been enormous) to define a commodity in such a way to never use the term securities. “We called it good and services for futures delivery, we also provide that the new agency would have exclusive jurisdiction which mean no other agency like the SEC could interfere and thus financial futures were born.”

Several books can be written about the machinations regarding legal terms that created the first interest rate contract and the need to create the Commodity Futures Trading Commission (CFTC) as a separate regulator with exclusive jurisdiction, noted above. It allowed for the rapid growth of futures.

He also pointed out how with emissions, which are still evolving, he had to start from scratch.

 

Good Derivative Are Well Good

Sandor highlighting his recent book said, “I call them good derivatives. They are good because they are regulated, exchange traded, transparent, perform a risk transfer function and facilitate price discovery in both the futures and the spot market.”

The book was necessary because derivative has become a dirty word thanks to the Lehman Brothers fiasco and resultant credit crisis. The irony is that many over-the-counter derivatives where created as an attempt by those who lost market share due to Sandor’s innovations to gain it back.

He said the industry hasn’t done a great in simply explaining the benefits of “Good Derivatives.”

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