Consequently, financial derivatives—both on centralized futures and options exchanges or customized in the OTC market—can be likened to a gigantic insurance company that allows financial market risks to be adjusted quickly, more precisely and at lower cost than is possible with any other financial procedure: a process that has improved national productively growth and standards of living.
However, with the financial meltdown of 2008 behind us, we know that without proper safeguards OTC derivatives can be misapplied and create risks that result in unintended consequences. The primary purpose of Dodd Frank legislation is to correct this problem to protect end-users. It is imperative to note, however, that futures markets operated flawlessly during the crisis. Our industry experienced no failures and did not apply for nor need government assistance. Point in fact, the new regulatory structure embraces the futures markets “mark-to-market” discipline.
Today our markets provide risk management capabilities on a nearly round-the-clock basis on a vast array of products that cover the gamut from finance to energy, from securities to the environment, from banking to agriculture. Today the trading “pit” has been electronically transported to every corner of the globe. Whereas as little as 10 years ago American futures exchanges were still predominately limited to floor-based execution. Now the trading screen enables everyone everywhere to execute trades without the need for physical representation on the floor of an exchange.
Thus, the future of futures markets is limited only by our own imagination. Congratulations to Futures on its 500th issue.
Leo Melamed is chairman emeritus at CME Group and chairman and CEO of consulting firm Melamed & Associates, Inc. He is a former chairman of CME who established the International Monetary Market (IMM) and was the primary driver in the creation of Globex.