However, the start of our stay in Singapore was a bit inauspicious when we arrived here on February 24. Some of your might remember that date as the day the world discovered the magnitude of the damage that could be inflicted by poor management controls and a single rogue trader. On that morning, the authorities were looking for Nick Leeson, the trader that single-handedly brought down Barings Bank and wreaked havoc throughout Asia’s financial system. Leeson put on highly speculative positions in futures and options on Japanese stocks and bonds that were not authorized by Barings. His positions spiraled into huge, mounting losses, until finally, he bankrupted the entire company. In sharp contrast to the unfolding tale of lies and malfeasance, the world also saw the stability, professionalism and integrity of Singapore as a financial center.
As I walked through customs with my wife and our four children, the youngest of whom was 8 weeks old, I soon learned of an unhappy coincidence ? I actually bore a resemblance to Mr. Leeson. It took more than a little convincing of the authorities that I was in fact who I said I was, but I soon demonstrated my true identity. That was not the last time that Mr. Leeson’s actions presented me with a challenge, and I will touch upon that later. That first day, and the weeks that followed were an adventure that I, and my family, will never forget.
What Barings’ collapse ultimately underscores is the importance of our industry’s universal commitment to integrity and how interconnected the industry is globally. Our business really knows no borders, and when reflecting on the state of our industry in preparation for my remarks, I thought about the many similarities between the CBOT’s challenges and goals, and those same challenges and goals of exchanges here in Asia today.
The CBOT is very focused right now on the implementation of advanced technology, market user access and distribution of our products and market data, and I know that those same topics are receiving a lot of attention within exchanges across Asia. The CBOT is also working to establish meaningful relationships with strategic partners, another initiative that is crucial to exchanges here, too. And of course, we all strive to deliver to our customers the liquidity and transparency they require.
And isn’t that exactly what forums like this one are about? Sharing information in order to gain insight and make our industry and our businesses more effective. So with that in mind, today I would like to spend some time talking about these challenges and goals and some of the initiatives the CBOT has undertaken to meet them. I also will take a few minutes to share with you my thoughts on the future of the industry.
In the nearly seven years since I left Singapore, the futures industry has changed in ways none of us ever could have previously imagined. To begin with, we have seen incredible growth in volume. During the last 10 years, exchange-traded derivatives volume has increased by about 180 percent. I am proud to say that the CBOT has participated significantly in this trend, with volume at the exchange up 154 percent in the last decade.
I believe that the most important driver of that trend has been technology. Technology has changed the landscape of our industry, breaking down borders and turning the futures markets into a 24-hour global business. Inextricably tied to technology advancements in the futures markets has been innovation. This pillar of our industry has been unwavering since the CBOT, the world’s first futures exchange, was established 156 years ago.
Nowhere has that innovative spirit been more evident than at SGX, which early on understood the value in providing customers with 24-hour access to global futures products. The CME® and SGX’s 1984 mutual offset agreement for Eurodollars made SGX a true pioneer in developing a borderless futures market. This arrangement was a key factor in building business at SGX and in establishing Singapore as a major regional financial center.
Even before advanced technology transformed our markets, the CBOT, like SGX, was at the forefront of globalizing futures trading. In 1987, the CBOT extended regular trading hours and began to offer night trading of U.S. Treasury futures. During the overnight session, pit brokers took orders that largely flowed from Japan and Singapore. While many Americans slept, Asia was open for business, and so was the CBOT. The CBOT’s night bond trading became obsolete when the exchange and its market users began to gravitate toward electronic trading and the benefits it has to offer.
The CBOT’s embrace of electronic trading was successful from the very beginning, and our volume originating from the screen has been a huge growth vehicle for the exchange. Knowing the importance of electronic trading to the CBOT’s business, three years ago we decided that we could offer the marketplace industry-leading technology with advanced tools to promote real-time dissemination of market data and to enhance trading opportunities. CBOT customers wanted increased speed, improved performance and greater efficiencies, and the exchange wanted greater distribution of its products. Our first step was admittedly ambitious. We set out to provide our customers with the very best electronic trading platform possible.
In January of this year, the CBOT made a seamless transition to a new electronic trading platform, powered by LIFFE CONNECT®. SGX recently went through a similar process with its rollout of SGX Quest, and I am sure that exchange’s experiences resembled ours. After our migration, we have found that the CBOT’s new platform not only improved upon our trading environment for existing market users, it also allowed us to reach out to new customers. And I am proud to note that the feedback on the new platform has been overwhelmingly positive.
Many exchanges in Asia have been extremely successful with electronic trading ? there are too many to name individually. These all-electronic marketplaces have developed significant liquidity and made a mark on our industry. I have every confidence that these exchanges, and others like them, will continue to grow and expand.
The CBOT, as I mentioned earlier, is the world’s oldest futures exchange, founded in 1848. Our history is one rich with the tradition of seeking out new markets. We began as a pure agricultural commodity exchange and later expanded our offerings to include metals, interest rate and equity index products. Today, one avenue for seeking out new markets for our products is the CBOT’s electronic trading platform. Exceeding even the highest expectations, the system has been a catalyst to several of the exchange’s global outreach efforts. And the system has made it possible for the exchange to offer customers a level of access we could never have achieved with our earlier electronic platform. For example, we recently introduced an electronic market maker program for the trading of financial options during extended hours, addressing the needs of CBOT customers in Asia and in Europe. Our market users now have an opportunity to conduct Treasury options trading in a liquid and transparent environment nearly 24-hours per day. And the program has had impressive success. Financial options set an electronic monthly trading volume record in September.
We believe that potential new markets exist in all corners of the world, and technology is one of the best methods of tapping into them. Nothing illustrates that fact more than a story in the New York Times newspaper earlier this year. The article detailed the life of a farmer in India in a small village of about 2,500 people. This farmer, the leader of his village, earned about $300 in 2002. In 2003, he earned that much in a single month. His income has increased sharply because of access to the Internet, where he checks weather conditions, soil-testing techniques, and prices. Every day, the farmer, located some 7,500 miles from Chicago, connects to the CBOT by logging on to our Web site. By checking the prices for soybean futures, the farmer has a good idea of when the village should bring its crop to market. To me, this anecdote illustrates the industry’s significance as a global provider of risk management tools and a forum for price discovery. It also could be a precursor to the future, when perhaps farmers in China, India and elsewhere all have the ability to trade our products.
Of course, it is not enough for an exchange to offer electronic access. It must also have the distribution necessary to encourage trading of its products. The CBOT together with its technology provider, Euronext.liffe, has an extensive network that has been instrumental in increasing the CBOT’s product distribution. We are leveraging communication and network hubs throughout Europe, offering an easy and rapid connection to the CBOT’s electronic trading platform. We are also working with Euronext.liffe to establish even more telecom hubs internationally. Hubs offer tremendous value because they provide a cost-effective method for remote CBOT market users to connect to the exchange. Together we have set up a hub with Euronext.liffe in Gibraltar, where the size of the trading community is growing at a rapid pace. We are also pursuing establishing hubs in other locations, with the Pacific Rim an area of interest.
Additionally, Asia has become an extremely important focus of the CBOT’s business. Several trends here have supported this priority:
- One, we are seeing a continuing shift toward market driven economies in countries such as China and India. Within these country’s economies, futures products will deliver a component of stability by bringing greater transparency to cash markets and by supplying a risk management tool that will help to manage growing businesses. Additionally, this trend represents a series of burgeoning opportunities for the futures industry.
- Two, there is a significant increase in multi-lateral trade between Asia and the rest of the world, as well as within Asia itself. The World Trade Organization estimates that total world trade increased by 4.5 percent in 2003, and the WTO is projecting 7.5 percent growth for 2004. Trade between East Asia and the U.S. not only represents the largest global trade flow, but has also been a key driving force for the world economy. Increased imports and exports lead to an increase of demand of hedging price risks, which will likely result in increased futures trading globally.
- Three, as I noted earlier, Asian countries are moving more toward electronic trading, and we hope that some day, we will see 24-hour access universally. As more people on this continent trade futures, we believe the value provided by the CBOT will attract these new market users.
The technology includes near real-time trade matching, essentially providing our customers with the timely risk management they require. These enhancements ultimately achieve better customer service for the CBOT’s market users by providing for more timely fills and better risk management. The new technology will improve communication between brokers, floor traders and firms and reduce the number of costly errors. Our customers will be able to manage their daily trading activity by seeing matched versus unmatched trades, and they will receive even more timely notification of trade errors, resulting in fewer outtrades.
After having spent some time talking about the challenges, goals, and current trends within the industry, I would now like to discuss what I see for the future of our business. In addition to a continued commitment to technology and access and distribution, I believe a few areas will be critical to ongoing growth of derivatives trading, one, the formation of strategic partnerships among industry leaders, two, the development of innovative products, and three, an ongoing dedication to transparency in our markets.
I just spoke about the trends in Asia and how they are creating increased trading opportunities within the industry. Because of Asia’s growing dominance in the world’s futures markets, the CBOT sees tremendous value in forging alliances with key exchanges in the Asia-Pacific region. For a long time, Asian exchanges have been extremely adept at developing partnerships, something I believe we will see happening with increased frequency in the industry at-large. Alliances with other industry leaders can enhance an exchange’s value proposition, while also opening its markets to potential new customers.
We currently have Memorandums of Understanding with five exchanges. The Sydney Futures Exchange, Dalian Commodity Exchange, Tokyo International Financial Futures Exchange, Taiwan Futures Exchange, and the Tokyo Grain Exchange. There are many exchanges here that are still emerging as participants in the global futures markets, and MOUs can serve as the basis for important relationships that will continue to develop over time. Further, by forging alliances with other global exchanges, the CBOT is working to facilitate access to its own products from abroad.
Each of the CBOT’s five MOUs is unique, and we have already begun to move forward with all of them:
- SFE ? This MOU was signed just last week, and we are very excited about cooperating on product development with the SFE. As part of the MOU, we will discuss a variety of opportunities, including products based on the Dow Jones Industrial AverageSM.
- Dalian: Our motivation behind forming an open and progressive relationship with the Dalian is really two-fold. One, we recognize the increasing demand from China’s grain companies and want to meet that need. And two, our MOU with Dalian is an effort to maintain the CBOT?s global role as the source for benchmark pricing for the agrarian industry. Thus far we have held a two- week training program in Chicago for Dalian staff and Chinese regulators, providing an intensive overview of various CBOT operations and departments. We also held a cooperative training program in Dalian.
- TIFFE: We are now looking at opportunities for cooperative marketing, given the fact that both of our electronic trading platforms are powered by LIFFE CONNECT®.
- Taifex: We have participated in presentations in Taipei on our Treasury futures complex to provide further education on these products. We are also currently discussing other educational opportunities, including helping each other in terms of index product marketing in the other's respective market.
- TGE: We are currently exploring our opportunities for collaborative efforts, including selective joint marketing sessions at industry events.
Another area crucial to the industry’s ongoing expansion is product development. We are seeing increased demand for exchange-traded derivatives products, and the industry must continue to work to meet that demand. The CBOT is in the process of introducing several new, innovative contracts, and we are relying on customer input to develop them.
We abide by a couple of criteria when working on new contracts:
- One, all new products developed by the CBOT fill an existing need in the marketplace and are a result of extensive conversations with our customers.
- And two, when developing new products, the CBOT looks to tap into the tremendous liquidity of its existing products. This generates more trading opportunities for current customers and also creates risk management tools for new market users as well.
We have spoken extensively with ethanol producers and consumers, who are seeking new alternatives to manage the price fluctuations that define the ethanol market. Corn-based ethanol futures will provide our customers with the risk management tools they need, while also featuring the full price discovery and transparency currently lacking in the cash market for ethanol.
A corn-based ethanol product is a natural extension of the CBOT's grain futures complex, and of course, the expectation of increased ethanol production has a direct relationship with corn production. We have seen impressive growth in corn production in the last 20 years, and I do expect that trend to continue. In 1984, U.S. corn production was 7.7 billion bushels, and according to the latest projections, this year production is likely to grow to about 11.6 billion bushels, which would be a record.
And we do not see the demand for corn and other grains subsiding. You only need to look at the growth in China’s economy. Even if that growth were to slow from current levels, the economy there is still expected to expand. If that occurs, then demand for grain from the world’s most populous nation will likely increase as well. And clearly, we at the CBOT expect an increase in demand for corn used in renewable fuel.
In addition to corn, the CBOT is also exploring the tremendous possibilities in the growth of demand for soybeans, both those grown domestically and abroad. By all measures, South America has risen to become a dominant force in soybean production. The dynamic of the cash market has shifted a bit recently, as South American soybean production has increased 250 percent since 1980. Further, Brazil and Argentina together now supply 50 percent of the world’s soybeans.
This development is significant because South American soybeans and the U.S. crop that underlies the CBOT’s futures contracts have their differences, largely due to seasonality. Firms in Brazil want an efficient and effective hedging and pricing mechanism for the South American soy markets. The CBOT has held discussions with major producers, processors and traders of soybeans and soy products in Brazil and Argentina, and many believe that a new CBOT contract with delivery points in South America is necessary.
Just to further illustrate how global our markets have become, China accounts for 17 percent of the world’s soybean consumption and is one of the large importers of Brazilian soybeans. Thus, Chinese importers of South American soybeans are another likely user of a futures contract on the product.
CBOT Chairman Charlie Carey, along with members of the CBOT staff, have made two trips to Brazil this year, touring major export ports and visiting with the Ministers of Agriculture and Transportation, as well as representatives from the Central Bank of Brazil. During these visits, we received solid support for a CBOT South American soybean contract, and the exchange looks forward to progressing further with its work on this important product.
We also recently launched two new products. 100 percent electronic full-sized gold and silver futures, which we began listing on October 6 alongside our existing mini-sized precious metals contracts. The exchange has a long history of trading in precious metals, and these new products bring gold and silver futures trading into a new era. Market participants globally now can trade CBOT full-sized metal products 21 hours per day in an open and transparent environment. Our customers asked the exchange to expand its metals complex beyond its very successful mini-sized metals contracts, and we believe our full-sized contracts will be fully embraced by the market.
While I spoke about the CBOT’s current efforts with technology, I also believe that continued innovation in technology will play a large role in the future of the industry, particularly through a trend that has emerged during the last eight to ten years: asset class convergence. The success in Europe of exchanges like Euronext.liffe and Deutsche Boerse and SGX and HKEX in Asia suggest that many market participants accept a more vertically integrated market model. We believe our customers also will find value in the ability to trade futures, options, stocks and over-the-counter agricultural products all on a single platform.
This pattern of convergence is likely to continue on a global basis, including within U.S. futures exchanges. Market users want efficiency and simplicity, and asset class convergence offers both. In order to meet customer demand, exchanges must have an operating system with open architecture and the flexibility needed to add a variety of asset classes to a single platform. There are several methods of achieving this alignment of liquidity pools. Of course, consolidation is one possibility. However, partnerships have also been very successful.
At the beginning of my remarks, I noted how much the futures industry has changed in the last decade. Of course, we will continue to evolve, but some key elements must remain the same if our growth trend is to remain on track. Ongoing investor confidence is crucial to the futures markets maintaining and building liquidity. The industry as a whole will continue to earn investors’ trust by holding firm to its commitment to transparency. I know that exchanges in Asia share the CBOT’s dedication to open and fair markets. True leaders within the industry provide a level playing field and a trading environment in which everyone has timely access to the same information. The role of the world’s futures exchanges is to create a central location for price discovery, and any practice that interferes with that role undermines an exchange’s integrity.
At the CBOT, market makers have the same opportunity to compete for all existing bids and offers, and this 156-year old tradition is something the CBOT will not compromise. This approach encourages the broad participation necessary for a successful futures market. Our market users know that no customer, or group of customers, has an advantage over another. This level of transparency makes price discovery fair and efficient.
The impact of a lack of transparency is very simple: without it, situations like the collapse of Barings, Britain’s oldest merchant bank, could become commonplace. My own personal commitment to transparency was shaped, in part, by the time I spent in Singapore.
On that day that I arrived, after getting through security in Singapore’s airport, I received several urgent messages from my superiors in the United States. Barings Tokyo represented significant financial interest of many U.S. FCMs, and because I was in physically in Asia, I became involved in sorting through the fallout of the financial disaster.
The Barings collapse became a defining moment for me personally and professionally. My family and I had moved to Singapore for what had seemed like an incredible opportunity, but Barings’ bankruptcy put that in jeopardy. Because of the Barings collapse, many industry participants were concerned about the integrity, financial stability and the surveillance of the market in Singapore. My counterparts in the United States began to question the original plan to expand our presence in Singapore and increase trading there.
Ultimately, my office and others around the world correctly concluded that Singapore demonstrated true leadership with respect to integrity and market oversight, and Barings? ruin was due to poor management controls within the bank itself. The ending to this story is obvious. Singapore remains a leader within the futures industry and a critical contributor to our business growth.
In addition to our industry’s universal embrace of transparency, there is another final overlapping element that cannot, and will not change in the futures industry. That is, the focus on meeting the needs of our customers. I have no doubt that we will see ongoing developments in technology, market access and in products and services, all designed to benefit market users. And I also believe that transparency will remain a fixture within our businesses. Moving forward, industry leaders must continue efforts to maintain investor confidence and to be stronger, faster, better, to insure that both exchanges and customers enjoy the rewards of continued success.
Thank you again for inviting me to be here today.
