The world of futures and derivatives lost one of its greatest leaders when Les Rosenthal passed away this past September. While most people involved in the futures and derivatives industry in Chicago know who Les Rosenthal was, some may not realize just how central he was to the explosion of innovation that occurred in Chicago with the emergence of financial derivatives.
“[Les] was an incredibly powerful force in changing the landscape of the futures industry, not only in Chicago but the world,” says Richard Sandor, chairman and CEO of the American Financial Exchange (AFX) and creator of the first interest rate futures contract. “Les chaired the Financial Instrument Committee [of the Chicago Board of Trade] with the launch of Ginnie Maes (the first ever listed interest rate future) and Les led and provided the political leadership that made financial futures possible.”
Rosenthal, like many industry leaders began his career as a runner on the trading floor. He became a member of the CBOT in 1958, and in 1970 formed CBOT clearing member Rosenthal & Co. Rosenthal was elected to the Board of Governors of the Board of Trade Clearing Corporation in 1975 and served as its chairman in 1978 and 1979.
In 1981, he was elected to the first of his two terms as Chairman of the CBOT and in 1982, he was one of the founding members of National Futures Association.
In 1988 Collins Commodities merged with Rosenthal & Co. to form Rosenthal Collins Group, which Rosenthal led along with J. Robert Collins.
Sandor, who created the Ginnie Mae contract when he was chief economist of the CBOT, credits Rosenthal’s leadership and support in allowing him to innovate. And that would continue as the CBOT rolled out more financial products.
This wasn’t an easy task. Sandor recalls that before Les chaired the Financial Instruments Committee, that committee actually never met.
“Nobody was interested except Les. Fred Uhlmann appointed Les [and] Les assembled the committee. People recognized him as a young leader,” Sandor says.
Rosenthal made sure that Sandor would have the resources to do the research necessary to create Ginnie Maes. “It was totally stalled at the time,” Sandor says. “Without resources to continue to do the research [interest rate futures would not have been created]. It was Les who [secured] a big budget. We hired J. Walter Thompson, we worked with Arthur Andersen. There were resources that were devoted to this because of Les; not only the research but the marketing and building of human capital in the legal area and the accounting area, none of that could have gotten done without Les.”
That continued as Sandor worked on building out CBOT’s financial products. “It was not only [Ginnie Maes], it was the Treasury bonds, it was the 10-year note, options on bonds— the stuff that I get credit for; none of which could have been done without Les Rosenthal,” Sandor says. “There are a lot of great leaders in this business, from Billy O’Connor, Jack Sandner, Leo Melamed and Bill Brodsky, [but] I would argue that he, as much, if not more than every well-known leader, affected the face of Chicago and the world of derivatives. Les was very shy about promoting himself. His loss for me was very personal; he was my closest friend and advisor. He would have never said it but he was the best political leader we’ve seen in the derivatives industry.”
“One of the things that Les valued was what he called original thought,” says Scott Gordon chairman and CEO of RCG Group and a former chairman of the Chicago Mercantile Exchange. “He valued that in others, he possessed it himself, and when you combine that with [the ability] to get things done [you have something special]. He was both a thinker and a doer, he possessed the ability to both create and get things done.”
It is no accident that Rosenthal seemed to stay in the background according to Gordon. “He didn’t care about who got credit for things. In an industry full of egos, he never cared to take credit for anything. He actually took great pride in just getting things done,” Gordon says. “I have never come across anybody who combined those three skills: Having original thought, being pragmatic and being able to put in places those things and not caring who takes credit. I am reminded of the quote, ‘there is no limit to what you can accomplish when you don’t care who gets credit for it. That’s Les.”
Anyone involved in launching new derivative products understands that it is a complex process. “You need the idea, you need to get a well-designed product and then you need to get the support of the government,” Sandor says. “In every step, Les supported that, whether it was a budget to educate the CFTC about what this new product was, a budget to advertise [or] a budget to work with accountants, these were all critical to the success of not only the Ginnies, but the bonds and notes that [came later].”
Fighting the Status Quo
They faced a lot of opposition and Les led the battle. “There was a big fight at the board level, they argued ‘if you introduced the 10-year [note], you would kill the bond.’ There was a big contingent of people that argued against it, Sandor says. “We needed liquidity and we needed Ginnie Mae permit holders and associate memberships and it was the same battle, ‘you are going to dilute the board of trade, it is going to hurt the seat prices.’ You had the same argument with commodity option memberships. [There were] political battles just to provide access to new kinds of members.”
Sandor points out that the vote to create the associate memberships, which allowed for hundreds of market makers in CBOT Treasury futures only passed by two votes. “I would argue that without the passage of associate memberships and option memberships, the board of trade and the industry would never have achieved its worldwide eminence, and those were Les’ battles.”
“Les had a sense of clarity and mental process that caused him to never reject an idea out of hand. He was completely open-minded and he loved being an agent of change, so we were perfect partners,” Sandor says. “Now it seems routine, but new memberships, having introduced a totally new commodity class, being the first to go to the CFTC, fighting the legislative battle to make sure that a commodity was defined in such a way as to allow for financial futures; he encouraged that.“
While the CME had been in a scramble to launch new products and asset classes at the time, many CBOT leaders had grown comfortable in their lead status.
“The Merc’s leadership was fantastic [and] most of the members were hungry,” Sandor says. “But the membership of the Board of Trade was not hungry so it took a leader to motivate them; that was a very difficult job. Remember the board of trade was everything back then and it had a big reputational risk in pushing for a redefinition of what a commodity was.”
Sandor says Rosenthal’s leadership was unmatched. “To turn the 1,402 members of the biggest exchange in the world on to new ideas; that was political leadership, Sandor says. “There have been a lot of great political leaders in this city, but he was unsung. Remember that this organization had no reason to change because it was the biggest and the best by a huge margin.”
Rosenthal was just as driven in innovation in the brokerage space as in the exchange space according to Gordon, who began his career at Rosenthal in 1971. “The drivers for the exchanges are similar to the drivers of the FCMs. I put it down to technology, regulation and globalization. For each of those drivers, he would say ‘where do we want to be tomorrow, how can we push things forward,’” Gordon says. “He was very good at communication. He always thought that dialogue would advance the ball. Those are the things that kept us going as an FCM. He was always willing to start new things, he wasn’t afraid of failure, he was a consummate leader, and he didn’t hesitate to change.”
Rosenthal was part of all the major innovations in the exchange space during the 1970s and 1980s. “He was involved with much of what happened in the Chicago futures industry, I am talking about everything. He never got direct credit. Anything that was of material import, in terms of technology, regulation or globalization he was involved in,” Gordon says. “He was a great friend, mentor, partner and boss. He certainly is going to be missed. The great thing about what he instilled in all of us is how to look forward and keep moving. The best tribute we can give to him is to keep it going.”