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OTC clearing has arrived. Talk to us about OTC clearing the opportunities. has arrived.

Talk to us about the opportunities.

As the OTC markets expand into central clearing you need a partner you can trust. With our experience, insight and established clearing services across exchanges globally, we are well equipped to support you. At UBS we look to understand your individual needs and build an intellectual partnership in order to provide scalable and flexible consultative solutions; delivering our market leading innovative services for the success of your business.

As the OTC markets expand into central clearing you need and as we you can trust. We have made significant investment in our infrastructure a partner continue to With our experience, every aspect of their Futures and Options business, we are support our clients in insight and established clearing services across exchanges globally, guide you through the to support you.for OTC. ready to we are well equipped new landscape At UBS weat Contact us look to understand your individual needs and build an intellectual partnership in order to provide scalable and flexible consultative solutions; delivering our market leading innovative services for the success of your business. We have made significant investment in our infrastructure and as we continue to support our clients in every aspect of their Futures and Options business, we are ready to guide you through the new landscape for OTC.
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CME GROUP MAGAZINE CME GROUP 20 South Wacker Drive Chicago, IL 60606-7499 312.930.1000 tel 312.466.4410 fax EDITORIAL DIRECTORS Anita Liskey, William Parke EDITORIAL ADVISORY BOARD Tim Andriesen (Commodity Products), Kate Darcy (Market Education), James Farrell (Technology), David Garland (Corporate Communications), Elizabeth Gisch (Globex Account Management), Jeremy Hughes (EMEA Corporate Communications), Dave Lerman (Hedge Fund and Broker Services), Gail Moss (Marketing Communications), Robin Ross (Interest Rate Products), Derek Sammann (Foreign Exchange Products), Allan Schoenberg (Social Media), Michael Shore (Product Public Relations), Scot Warren (Equity Index Products), Meg Wright (Legal), Jaime Yeh (Product Marketing)

FALL 2010 Issue 19

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DO YOU HAVE A QUESTION FOR CME GROUP MAGAZINE? E-mail us at with your questions and comments, or to be added to or removed from the mailing list. Further information about CME Group and its products is available on our website at Information made available on our website does not constitute part of this document. The Globe logo, CME Group, CME, E-mini, Globex and Ideas That Change the World are trademarks of Chicago Mercantile Exchange Inc. The Chicago Board of Trade and CBOT are trademarks of The Board of Trade of the City of Chicago, Inc. New York Mercantile Exchange, NYMEX and ClearPort are registered trademarks of the New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. The Dow Jones Industrial Average and Dow Jones Indexes are trademarks of CME Group Index Services LLC. BM&F is a trademark of the Brazilian Mercantile & Futures Exchange S.A. BOVESPA Stock Index is a duly registered trademark of BM&FBOVESPA. KOSPI is a trademark of the Korea Exchange Company Republic of Korea. NASDAQ is a trademark of The Nasdaq Stock Market, Inc. (which with its affiliates are the Corporations). S&P and S&P 500 are trademarks of McGraw-Hill Companies, Inc. Case-Shiller is a trademark of Case Shiller Weiss Inc. Green Exchange and Green Exchange Venture are trademarks of Green Exchange Holdings LLC., used under license. Unless otherwise indicated, references to CME Group products include references to exchange-traded products on one of its regulated exchanges (CME, CBOT, NYMEX, COMEX). Products listed in these exchanges are subject to the rules and regulations of the particular exchange and the applicable rulebook should be consulted. Information on trading strategies and products is included for educational purposes only and does not constitute trading advice or constitute a solicitation of the purchase or sale of any futures or options or guarantee any particular trading result. The rulebook of the applicable exchange should be consulted as the authoritative source on all current contract specifications. Articles herein authored by third parties are taken from sources believed to be reliable. © 2010 CME Group Inc. All rights reserved. CME Group Magazine is printed on recycled paper.


Financial innovation is the lifeblood of the financial markets. What’s coming next in an environment that demands increased transparency, greater accountability and lower risk?

To read CME Group Magazine online, as well as view Podcasts, Webinars and more, visit us at


So a hike is sure to come soon… or maybe not. China still stirs the copper market. 16 When Disaster Hits Firms and agencies are prepping for the worst. FALL 2010 5 . 12 Jon Corzine Back in the Game Jon Corzine talks about politics and his new role as MF Global’s new CEO. 38 Interest Rate Outlook: Low and Slow Interest rates continue to hang at record lows. and that’s good news. 35 Handicapping the Fed A look at short-term interest rate liquidity and the latest tool from CME Group – FedWatch. 24 Breaking Up Is Hard to Do UBS economist Paul Donovan looks at the cold hard facts for the euro. Executive Chairman and CEO. 35 28 The Next Frontier of Market Innovation Here’s what’s next on the horizon for financial innovation.CONTENTS FALL 2010 Issue 19 12 8 From The Top A letter from CME Group 20 16 20 China’s Copper Kettle Make no mistake.

we through a a heritage of 225 years of market leadership. and productive. Products and services jurisdictions worldwide and registered with local regulatory authorities may be required.mfglobal. Please consult for more information. Experience Experience 365 365 Ex Insight Insight 360 360 Relationships Relationships 24/7 24/7 In Re Re mfglobal. and productive. we create targeted solutions for clients around the world. Trading in financial instruments may involve significant risk ofof loss. visit mfglobal. success is mfglobal. ©2010 MF Global Holdings Ltd. Nothing contained herein should be considered as an offer or the solicitation ofof an offer to sell or to buy any financial instruments. visit mfglobal. By applying the key elements of success honed through heritage of 225 years of market ©2010 MF Global Holdings Ltd. Deep create targeted solutions for clients around the world. When the chemistry is right. success is inevitable. MF Global As a leading cash and derivatives broker. Please consult www. . Trading in may not be available all jurisdictions. As a leading cash and derivatives broker. Products and services may not be available inin all jurisdictions.mfglobal. subsidiaries located jurisdictions worldwide and registered with local regulatory authorities asas may be required. deliver exceptional results. long-standing relationships are the elements we combine long-standing relationships are the elements we combine toto deliver exceptional results. MF Global transforms market risk and opportunity into our clients' transforms market risk and opportunity into our clients' for more information. actionable insight. actionable insight. By applying the key elements of success honed The products and services mentioned herein are available from MF Global Holdings Ltd. Deep market experience. offer or the solicitation an offer to sell or to buy any financial instruments. To learn how MF Global can turn the elements success into To learn how MF Global can turn the elements ofof success into your your advantage. Nothing contained herein should be considered as an financial instruments may involve significant risk loss. subsidiaries located in in The products and services mentioned herein are available from MF Global Holdings Ltd.When the chemistry is right. market experience.

55 Got an Eye on You Technology watches traders. 51 Korea Exchange Goes International Korea Exchange brings its Kospi 200 index futures global. FALL 2010 7 .com/magazine Central counterparty clearing services have existed in the over-the-counter (OTC) derivatives market for a number of years.CONTENTS 24 42 State Capitalists on the Fast Track Ian Bremer looks at the hybrid “capitalist state” in his new book The End of Free Markets. 42 59 Current Pulse zz In the Palm of Your Globex zz Wharton Hedge Fund Conference zz Simplify It zz Calgary Connection zz Green Light zz The Story of Innovation 55 Featured on cmegroup. 46 The Algorithm of Success Prague-based RSJ rises to be one of the biggest trading firms on CME Group. 62 Finding Green in Unexpected Places CME Group’s new data center is the size of four NFL football fields and just as green. Expanded OTC clearing will require market participants to rethink the way they structure and trade OTC derivatives.

Craig Donohue (left) and Terry Duffy (right)




Details create the big picture, but when it comes to the financial reform legislation that President Barack Obama signed into law this summer, many of the details remain to be seen. The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most sweeping rewrite of U.S. financial regulation since the 1933 Glass-Steagall Act. The new legislation is a comprehensive banking and financial services reform package that includes significant changes to the oversight of derivative markets. The Dodd-Frank Act contains numerous provisions that have an impact on how overthe-counter (OTC) and listed derivatives are traded. More standardized OTC derivatives will trade on exchanges or other trading platforms, and will be routed through clearinghouses post-transaction. U.S. regulators will also be involved in setting capital and margin requirements for dealers and major traders and crafting new business conduct standards and reporting requirements. Exactly how and, to a certain extent, when this will be done has been left in the hands of the Commodity Futures Trading Commission (CFTC) and other regulators and government agencies. Because of that, the rule-writing process is considered to be nearly as important as the drafting of the financial bill itself. The bill gives regulators leeway to fill in the blanks on key areas, so agency rulemaking will determine the final shape of reform. An important concern raised about financial reform is that it could potentially stifle financial innovation. Innovation has always been a driving force at CME Group. Our cover story for this issue looks at some of the significant innovations of recent years and the outlook for new ideas, concepts and products going forward. Other subjects covered in this issue include:

• • •

MF Global chief executive officer Jon Corzine’s perspective on the evolution of financial markets gleaned from his 30-plus year career in financial services and public service. The rise of “state capitalism” and the challenges it presents to free markets as perceived by noted political risk consultant Ian Bremmer. China's rapid ascendancy up the global economic ladder and the impact of its growing demand for copper.

We hope the details you find in this issue of CME Group Magazine will begin to give you the big picture as we move through this next, historic stage in financial markets.


Executive Chairman


Chief Executive Officer

FALL 2010




Corzine was chairman and senior partner at Goldman Sachs. FALL 2010 13 . Prior to that. where he spent more than 20 years. Senate from 2001 to 2006.jon corzine Back in the Game jon corzine returned to the financial industry in march 2010 as chairman and chief executive officer of MF Global Holdings Ltd. Corzine served as governor of New Jersey from 2006 to 2010. and in the U. his vision for MF Global and where today’s regulatory environment will lead the firm in the coming months and years. after spending the previous decade in public office.S. CME Group Magazine sat down with Corzine to hear his thoughts about coming back to the industry.

If there are gaps. Politics is nothing if it is not a place to have a strong voice on the things you care about. But there’s a lot more cooperation among governments and regulators today with common accounting standards and common bank capital charges. On the other hand. or one with excessive risk. the price of entry may be so high in some areas that places like MF Global will be challenged. Financial reform is designed in part to police some of these historically new products. to make sure the system is not exclusionary. And they have the ability to understand the system significantly better than all of the regulatory agencies did before because they can identify significantly risky institutions. systematic recognition of the existence of risk and how it is managed. It is still just a few months since you took the reins at MF Global. people will work creatively within those constraints. That provides a solid framework to build upon. We refinanced our liquidity facility. But we don’t intend any longer to be just a pure brokerage firm. because you’re of course a large clearing member firm? We have the knowledge and expertise to deal with exchange traded and cleared products that should give us an edge. 14 CME GROUP MAGAZINE What does the global derivatives landscape look like to you now and going forward? You’re going to have a globally integrated system. The execution is focused on the people you serve. Will we still see financial innovation in this new regulatory environment? Absolutely. You’ll have a greater recognition that there is a high degree of relationship between all asset classes that gets reflected on exchanges. You left Goldman Sachs in 1999 and served in political office for a decade. Sometimes there needs to be position limits placed on participants based on their capital.S. financial regulation is also important. It is a great place to give back if you are properly motivated. not only as a futures commission merchant (FCM) but also as a broker-dealer and engaging in activities well beyond what this firm has been traditionally involved in. We know some markets really well such as metals and energies. So does that leave MF Global in a good position. Then people will invest more and the economy will grow. So I had some of the same frustrations that many people have.and micro-environment before I got into government. There is a lot of know-how. We want to be a broker-dealer and perhaps expand into advisory and/or portfolio management ser- . from the standpoint that our customers will want more intermediation in a rising interest rate environment. that plays to the core strengths of the franchise. but that also comes with risks on the principal side. It won’t be perfect. especially non-bank brokers. really needs to be part of the financial system. variation margin. vices over time. Today’s markets are more global and interconnected than ever. our financial system will have the immediate levers of the Fed. I think change begets innovation. not just on financial and economic activities. Should regulation be administered on a global basis? Yes. That will change and provides a very strong means to expand our relationship with clients and can be done without turning into a proprietary trading shop. Having clearinghouses. There are niches of extraordinary strength. And there will be a greater diversification of risk and intermediation. financial system. We have a very significant client group with a very good deposit base. I’m sure that once other countries take on the challenge the president and Congress just completed.BACK IN THE GAME With your long career in the financial services industry and in politics. So if you are strictly limited to commissions. why did you decide to take the chief executive officer position at MF Global? This is an underdeveloped asset. you will get some matching up of the systems on a global basis because people understand that regulatory arbitrage was as much a part of financial crisis as CDOs and CDSs. And that is going to leave room for new entrants. there is plenty of room to grow and I’m excited about it. We recently conducted a stocking offering to significantly improve our equity position. as opposed to serving yourself. Basel III or any other changes. Financial reform was just completed. It will be different but once the rules are set. it can hurt the whole system.S. if you limit yourself to brokerage alone. That demand will flow to other aspiring institutions. And on that score. and we intend to be one of them. We’re moving along in other core businesses such as equities and fixed income and have a strong foreign exchange business. but not be precluded from them. Whether you do that in the context of financial regulatory reform or Basel. most of the real work will be done by staff of the Federal Reserve. Certainly in the mid-sized broker-dealer/investment bank space. How can MF Global navigate that environment? First. That’s good because in a time of crisis. changes to the regulatory systems. The brokerage business. The derivatives part of the legislation is great for the system because it will bring more capital in and make it less risky. Maybe the most important piece is the central oversight board for all aspects of the U. MF Global is truly a global firm. What impact do you see it having on the derivatives and brokerage space? First. The deleveraging of the system. There is a lot of work yet. has been hurt by the low interest rate environment over the past year or two. but also in education and other areas. One of our problems has been that we have not been a principal risk taker to facilitate our clients in listed markets. but what can you tell us of the plans going forward? There are a lot of good people working here. What experiences do you take from those roles? I was honored to serve in public life. Even with the chair of that oversight board being the Secretary of the Treasury. We’ve done a lot of things I think will lead us to a great position going forward. I’m excited about repositioning a good franchise into what I think is a pretty attractive space that’s been created first by globalization and the change in the way the general financial services industry operates. and global economy in peril. it is a positive for the economy. There are some who believe that financial engineering – such as collateralized debt obligations (CDOs) and credit default swaps (CDS) – put the U. So we will have to work with the dominant clearing players in some other format to meet the requirements of the system. I saw the importance of the role of government in shaping the macro. I had a lot of views about the direction. We’re one of the premier FCMs in India. means a greater opportunity to access clients who want risk intermediation but now won’t have access at those same kinds of leverage elements with some of the existing participants. or new players in various parts of the marketplace. you will be limited. I don’t think there will be any less demand for risk intermediation. that clearly is a challenge. in an ideal world. It’ll be nice when interest rates rise. People are working on refitting securitization so it will have greater transparency and simplicity.

Our commodities team leverages this insight to customize client solutions across a wide array of products including structuring. wet and dry freight and weather products. commodity indices. trading and marketing of metals. Securities.A. member FDIC.Leveraging every facet of global commodities. power. refined products. ©2010 Bank of America Corporation. and. Whatever your challenges. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed. Pierce. derivatives. structured notes. Lending. coal. emissions. Understanding and insight into the multifaceted global commodities markets is a critical advantage. and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”). locally registered entities. Fenner & Smith Incorporated. crude oil. and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation. including. which are both registered broker-dealers and members of FINRA and SIPC.. in the United States. we deliver a perspective that can help you shine in any market. Banc of America Securities LLC and Merrill Lynch. “Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. natural gas. including Bank of America. strategic advisory. N. . in other jurisdictions.


FALL 2010 17 . but the difference between a minor disruption and a disaster can come down to the preparation and ability to deal with surprises.Unexpected events can wreak havoc on business operations.

the Northeast blackout of 2003 in the United States. says such private-public partnerships help coordinate resources during a crisis on some of the most practical matters such as simply identifying where citizens can withdraw cash. credentialing and information sharing between public and private. experts say. Hurricane Katrina in 2005 – all of which tested the resiliency of business operations. Technology has allowed desktop virtualization – where employees can access their work computer from home or another remote location – to become a viable alternative. The more proactive firms tell their investors that they have infrastructure in place to avoid a significant business disruption during a crisis or disaster. Smart companies used lessons from these events to build business continuity plans for use when emergencies strike. The BP oil spill is the most prominent recent example of not being properly prepared and is a cautionary tale for companies. but how can I take people to the new location.” Another intangible asset that is a part of business continuity plans: image and reputation. “It’s not just how can I back up data. vice president of data center operations at CyrusOne. WHEREVER YOU ARE The H1N1 flu pandemic also underscored how important communication is between Services Information Sharing and Analysis Center monitored ATM transactions to see what areas had power and which ATMs were able to dispense money to get funds distributed. There are generally fewer fiber optic lines in residential areas where someone telecommuting could be competing for bandwidth with a neighbor downloading a movie. but never is a long time. Groups such as the Futures Industry Association (FIA). do they have places to shower. Kenneth Wolverton. especially if you’re a public company?” Wolverton asks. Godzilla might not rise from Lake Michigan. where Rapa serves as chairman of the business continuity committee. and private and private groups. cyber threats have become much more visible.” Rapa says not only has testing of primary and backup systems become standard. There already are priorities for telephone and wireless access.” which focuses on how it would affect finance.” Because the Internet has become such a part of everyday life. says one result of collaborations between firms and the local government is the Chicago Critical Infrastructure Resilience Task Force. executive director.” Tishuk says. but such priorities are needed for the Internet. says business continuity previously was focused on the technology side. “The public is now asking.” says John Rapa. “Yes there should be net neutrality. “Testing and varying of testing scenarios is the number one lesson learned from past disasters. Proactive companies then review and test those plans to make sure they are operable when needed. The FIA and Securities Industry and Financial Markets Association have common industry disaster recovery tests set for Oct. The poor economy could cause some business to look warily at costs. but –You can–t perform critical business operations if you–re not real time. We simply want a priority switch during emergencies. 23. Whether it is as simple as a “phishing” scam to someone trying to shut down systems. the task force addresses evacuation plans. “A significant business disruption or a crisis is a bad way to find out your plan does not work. Launched in April. places to sleep if it’s an extended time. FSSCC and the Financial ChicagoFIRST advocates priority business access for the Internet in cases of national crisis. The financial services industry is no exception. This bill suggests establishing a director of cyber security and a private-public partnership to set national cyber security priorities and defenses. executive director for ChicagoFIRST. chair of FSSCC. the H1N1 flu pandemic. FINDING SECURITY Johnson says FSSCC has looked at threats from cyber space and is working to improve intelligence sharing with the federal government. But that is yet to be reconciled with the current idea of “net neutrality” which provides everyone equal access to the Internet. “What’s the PR loss. a financial services management consulting firm. “Yes. These partnerships are unique as they bring together firms and organizations that might normally be competitors. there’s a desire to have a ‘kill switch’ to the Internet.” Tishuk says. businesses and the government. but potential business partners and regulators are doing more rigorous analysis that may be shared.S. Brian Tishuk. are privatepublic partnerships that work on a regional and national level to help members with best practices. “It’s teaming up to know what the government’s plans are in an emergency and how firms can be part of the solution. which operates corporate co-location facilities in Houston.The past decade has offered its share of unforeseen events – 9/11. ChicagoFIRST One growing trend is allowing and enabling employees to work from home in cases of emergency. Wolverton says. 2010. The H1N1 flu outbreak underscored the need to plan business operations when employees would be unable to enter buildings but access to systems was still possible. Senator Joe Lieberman called “Protecting Cyberspace as a National Asset Act of 2010. Rules on the topic still need to be worked out between the Department of Homeland Security and the Federal Communications Commission. That can slow down Internet access and become an issue if telecommuting workers have to share bandwidth with nonbusiness users during an emergency. have offered common testing dates for the industry to test resiliency and preparedness. Groups like ChicagoFIRST and the Financial Services Sector Coordinating Council (FSSCC).– BRIAN TISHUK.” Wolverton says. One FSSCC study highlighted the threat from undersea communication cables to the international financial system. Shawn Johnson. Rapa says “the core of business continuity planning” identifies what businesses. “People may say it never will happen. During the Texas hurricanes last year. but who would have thought planes would fly into buildings?” Rapa says. systems or processes are considered critical to the individual company.” Tishuk says. One concern about events like the H1N1 pandemic is that Internet access in areas outside a business district can be less than robust. president and chief executive officer of Tellefsen and Company. so far that does not seem to be the case. “You can’t perform critical business operations if you’re not real time. “In the case of cyber attacks. but now “the people side” is receiving attention. These plans focus on critical needs to return to as normal a business pace as possible. ‘why didn’t you have that put in place?’” 18 CME GROUP MAGAZINE . Dallas and Austin. From there a business continuity strategy is formed that can cover everything from technology in the workplace to the death of the chief executive officer. cyber security has become a greater part of resiliency programs. The organization has also been asked for input on a bill sponsored by U.

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230 metric tons. Nicholas Snowdon. electricity generation and power lines.2 million metric tons of copper in 2009. China is by far the biggest and most important. China is “the elephant in the room. That economy.” she says. up 119 percent from the previous year. estimates China currently consumes about 38 percent of the world’s refined copper. Soon.” Snowdon says. Since 2000. China has eclipsed the United States as the world’s largest consumer of energy. commodities analyst for Barclays Capital.” says David Thurtell. according to projections by IHS Global Insight. Catherine Virga. was applying the brakes to cool its white-hot economy. air conditioners and infrastructure. an economics consultancy. While it is not the only game in town in terms of copper demand. Virga does not think so. housing. a good deal of China’s copper demand is related to residential construction and infrastructure expansion. senior base metals analyst at CPM Group. “That’s coming from a level of below 10 percent in the 1980s.3 billion this year to 1.710 metric tons in May and well off the 477. There is no escaping the country’s demand for copper and it cannot be ignored any more than China’s rapid ascendancy up the global economic ladder. The future bodes well for the seemingly symbiotic relationship between China and copper. adding that a move toward 40 percent or even beyond is not out of the question over the next few years. Gross import figures for copper fell in June to 328. “Those processes are far more limited in developed economies than in countries such as China and India.” Snowdon says. after reaping a rich economic harvest from a $586 billion fiscal stimulus. a commodities research firm. a Citigroup metals strategist in London. concerns surfaced that Beijing.220 metric tons imported in June 2009. And in the coming months. “This is not atypical for the FALL 2010 21 . In short. China’s copper demand has almost tripled. Rising living standards in the world’s most populous nation – China’s population is forecasted to increase from 1. has been driving copper prices for years.When it comes to copper. In the world of base metals. China is the leading consumer. it also will supplant the United States as the top manufacturer.” But the real question is whether the downward trend would continue.43 billion by 2020 – means more automobiles. “What we’re seeing in China is restocking efforts. some of the copper-rich comforts to which the West has grown accustomed for decades. even though the International Copper Study Group estimates a 13 percent drop in the country’s demand for copper in 2010. says the June numbers “were lower than we were expecting. down from 396. more than any other. its influence on the red metal will likely grow. China imported a record 3. HOME GOODS In the summer of 2010.

particularly the latter part of the month.” Virga says.200.” Virga points out that price forecasts for the third quarter of 2010 have copper averaging about $6. copper for threemonth delivery was around $6. “We expect market fundamentals to tighten over the next 18 months. “We’ve seen demand from Asia that was flat-lining. compared with $3. “so we expect record price levels essentially over that time. depends heavily on imports. is barely keeping pace with demand. He also believes there will be “significant producer selling once copper heads back above $7. though. Much of that talk was muted by the 2008 global economic crisis.7 percent.” says Thurtell. as there will be higher copper content in electric vehicles” than in traditional cars and trucks. It’s complicated.830 per metric ton.500 per metric ton that could be maintained for a prolonged period of time.” CME Copper Volume for Jan-Jun 2009 and Jan-Jun 2010 1. At the London Metal Exchange.000 China is expected to be the main engine driving that price surge.” in terms of production and demand.000 200. “You’ll see greater emphasis on electric vehicles and that’s likely to support copper usage as well.000 a ton. and as a result we believe the market has overreacted to these concerns. copper circles buzzed with speculation that the metal was entering a commodity super-cycle.00 a pound in mid-summer.000 400. A lower growth of only 2. So after being limited by operational constraints and temporary cuts in 2009. Once China’s had its day. analysts agree.7 percent in 2009 to 84 percent in 2010. with capacity utilization rates seen improving from 80. is “a bullish metals story and it will remain that way for some years. Copper futures for September delivery at CME Group were just above $3. meaning a price of $8.” Barclay’s forecast for 2012 calls for copper to average $8. with force.000 range “will be seen as a bargain in our view. adding that China and its future growth path “have certainly created a new dynamic to commodity markets.” “Our economist’s forecasts have held firm to the view that the global economic recovery will be sustained.600 a metric ton. who admits he is not as bullish as some who say the price could climb as high as the supercycle price.” says Snowdon. which is why estimates vary so much.500 a metric ton. copper had flirted with $8.500 next year. “We think copper is going to hold at the $6. while a copper producer. it’s India’s turn.” So where are copper prices headed over the next six months to a year? Most likely upward. copper market.” CHINA THE DRIVER projected by the International Copper Study Group to increase by 6. We have seen many periods of restocking in China.900. mine production in 2010 is 600. “so it will be $6.9 percent is envisioned for 2011 because of deferrals and delays in mine projects prompted by the economic crisis. current price levels in the mid-$6. whether you adjust for restocking inventories. In the fourth quarter.000 1.” In June. although their forecasts differ somewhat.” says Snowdon.000. meanwhile. stockpiles declined.” Copper stockpiles usually rise in the summer with the traditional lull in Northern Hemisphere manufacturing. Electrification in China “will continue to support robust growth in copper demand. sums up Thurtell. In April. And few new mine projects are scheduled to come on line in the next couple of years.000 metric ton mark and maybe go as high as $7. according to Thurtell. China and copper. moving toward very low levels. The entire industrialization process in China should continue to support sustained global demand growth in copper. whether that’s the European fiscal issues or the effects of policy tightening taking place in China.000 0 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Electronic Volume Pit Volume Ex Pit Volume 22 CME GROUP MAGAZINE . “Then it started to rise and in late June it picked up kind of.” he says.000 800. particularly in the United States and Europe. CPM is forecasting “a little more strength as copper moves into deeper deficit conditions.500.CHINA’S COPPER The entire industrialization process in China should continue to support sustained global demand growth in copper.60 in April. Production. SUPER-CYCLE ME Just a few years ago. It depends on how you calculate demand. Through midJuly. Analysts say that will happen because China.” Given the copper balance for 2010 and 2011. Snowdon contends the market has been “overly concerned about economic uncertainties recently. And prices reflected the change.

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if the monetary union does not work. is that even if it is inadvisable to join. there had to be a political desire to participate. The Greek fiscal woes. the components share a single interest rate and a single exchange rate. it is almost im- FALL 2010 25 . Netherlands. The debt is denominated in euros. of course. Beyond that. The issue with the euro and indeed any monetary union. So. does that mean it is about to fragment? Absolutely not. In a currency union. much of what we see this year is the symptom of the disease. brought the birth of the euro in 1999. The currency has been a success in the view of many but the financial crisis has exposed cracks in the currency as certain European countries saw their economies spiral downward faster than others. SEVERANCE COSTS The costs of departure are huge. BREAKING UP IS HARD TO DO WHAT IS THE MATTER WITH THE EURO? In 2010 we have seen the single currency fall in value. these were arbitrary and glossed over. Setting an appropriate single interest rate to be shared by one country or region that is growing at 3 percent a year. In fact. A weak economy that leaves would almost certainly default on the national debt. However. or the new drachma or the nouvelle franc. Levels were actually spelled out in the Treaty of Maastricht – a maximum 3 percent gross domestic product (GDP) deficit. The “irrevocable monetary union” that was established by the Treaty of Maastricht has even had some commentators suggest that it might be time to revoke membership for some of the participants. The second criterion was a reasonable balance sheet. Government debt and deficit levels had to be at manageable levels. Leaving would mean that the exiting country has a new national currency – the nuova lira.The Treaty of Maastricht. On this basis. The most critical criterion for a successful euro was that the participants had to have economies that were fairly similar in their structure and growth patterns. the euro could probably have comprised six economies – Germany. it is even more inadvisable to leave once one is inside. Now UBS economist Paul Donovan takes a provocative look at the pluses and minuses for the world’s second largest reserve currency. bond spreads widen out and extraordinary measures established to aid Greece and potentially other sovereign states. Austria. France. With no tax revenue in euros. Luxembourg and. Belgium. not the cause. and another that is growing at -3 percent a year is pretty much impossible. First. The real economies need to converge and stay converged. with some generosity as to debt criteria. the volatility of financial markets and the divergence of growth are all in response to a single underlying problem – the euro does not work. signed in 1992. That was the easiest hurdle to membership as most countries wished to join (the exceptions were Denmark and the United Kingdom). and a maximum 60 percent GDP debt level. the euro is doomed to fail economically. THREE CRITICAL ELEMENTS Three basic criteria were necessary to make the euro an economic success.

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Workers are not moving across national boundaries. seems inevitable. that is the conclusion of the European Central Bank’s (ECB) legal advice. The default story is bad enough. or in the form of bond issues. A default event. This is where the difficulty comes in. More significantly. major civil unrest has to be thought likely as well – but that is perhaps left to one side in the analysis. l0 9 g0 Se 9 p0 O 9 ct -0 N 9 ov -0 D 9 ec -0 9 Ja n10 Fe b10 M ar -1 0 Ap r10 M ay -1 0 Ju n10 Au FALL 2010 n Ju Ju 09 27 . It will require more integration.40 1. Does this mean that the euro area is condemned to a dire economic future? Not necessarily. monetary union in 1933. The current crisis is just the first in a series over that period.30 1. clutching large suitcases and demanding that the contents of their bank accounts be handed over in euro notes. but departure seems unlikely given the horrific consequences. The first is labor flexibility or pay restraint. like the United States 80 years ago.S. of course. Can Europe do this? Probably. a run on the banking system precedes the departure from the monetary union. be applied within the EU as it is all effectively “interstate commerce. Fiscal confederation is the way to think about it – a simple redistribution mechanism without a strong central government. France. has no John Steinbeck to urge the process on. and strong economies are restrained. Growth implications suggest the ECB will keep interest rates lower for some time. and the subsequent banishment from international capital markets. Finally. If areas with high unemployment restrain wages they eventually become more competitive and balance is restored to the monetary union. Certainly. for instance – but it does mean that the citizens of California receive welfare benefits funded in part by the federal tax receipts from New York residents. The domestic banking system is likely to be debauched in advance of any euro exit. However.20 There are three routes to making the euro work – routes followed by the United States in the 1930s after the effective collapse of the U. five years or more.25 1. a euro exit means sovereign default. Any attempt by the exiting country to devalue the new currency will be met with tariffs from the remaining EU members. perhaps. Europe. however. Their domestic revenue streams are now in the new national currency. but it does not stop there. The U. (Tariffs cannot.S.35 1. That does not mean that weak governments are subsidized. drawing on the bank’s world-wide resources. This is not to say the U. departure from the euro almost inevitably means departure from the European Union (EU). there is a distinct possibility that at least one weak economy will restructure in the next few years. Unemployed workers move in search of jobs. Europe has achieved a great deal of integration over the past half century but most of it has come out of a crisis. Europe can solve its dysfunctional monetary union. THE RIGHT ROAD EUR/USD FUTURE PRICES (USD per EUR) 1.possible to pay even a part of the national debt. Practically. but rather that weak economies receive a stimulus they do not have to pay for. Trade ties with all an economy’s key trading partners are broken. tariffs against one’s exports to eurozone countries and the ending of most major trade relations. This has happened in parts of the eurozone. Constant reminders of the fault lines in the euro will be an effective deterrent for euro appreciation. a major negative growth shock. it means that the international confidence in the existence of the euro will remain weak.”) So. The problems of the euro make it a worse currency. it would not do to be too pessimistic. What makes a euro exit even worse is that the corporate sector will in all probability have to default. dollar is a good currency in the coming years – the problems of the dollar make it a bad currency. needs a fiscal union if it is to make its monetary union more effective. For Europe to get to a fiscal confederation.45 1. The third option remains – and this is the path that Europe is tentatively embarking upon. Indeed. what does this mean? The periodic crises of Europe are likely to keep downward pressure on the euro. exit from the EU. Corporations will have euro liabilities to overseas banks. it would likely require a series of additional crises. If labor flexibility does not apply. The current crisis provoked further integration such as the various bail-outs. but it will take time.S. Europe. however. The euro does not work. but it is unlikely to be a universal solution. In short. should probably be classified as a southern European state. Germany and other north European states may pursue this. This makes the economy more homogenous and a single monetary policy more effective. there is always labor mobility as a second option. corporate default. There is little evidence of the southern European states embarking on such a course of action. countries can default or restructure debt within the euro. in this context. fiscal union does not mean the government of California receives direct assistance from the taxpayers of New York. sadly. Paul Donovan is managing director and deputy head of global economics at UBS. a debauched banking system. Depositors who fear that a country may exit the euro are likely to turn up at their banks in advance of the exit. The ongoing debt problems of southern Europe keep the structural flaws of the euro at the forefront of investors’ minds.50 1. Considering that. He is responsible for formulating and presenting the UBS Investment Research global economic view.


such as collateralized debt obligations.THE NEXT LEVEL of INNOVATION Financial innovations of the past 30 years. greater accountability and lower risk. FALL 2010 29 . are getting much of the blame for the current economic downturn. Here is what is on the horizon in an environment that demands increased transparency. But in a globalized world with rapidly developing technology. the need for new forms of finance and commerce continues.


continue to serve a key function in facilitating the movement of wealth and minimizing risk.” To create a friendlier environment for product development.” He also cited “a systematic bias against the new versus the old. “The marketplace is a little hesitant to embrace new frontiers. He has worked with CME Group to establish market listings and he developed the S&P/Case-Shiller Home Price Indices with economists Karl Case and Allan Weiss. Gary DeWaal.” says Julie Winkler. a new Council of Inspectors General on Financial Oversight could wind up following major trails of foul play. Continuous workout mortgages Proposed by Shiller in his book Subprime Solution. Then imagine yourself in such a world. after a peak in 2008. which was signed into law July 19. as measured by new product volumes. self-amortizing home mortgages and no credit cards. director of the M. according to Harvard University economist and Nobel laureate Robert Merton.” the report notes. these issues of bank debt would convert to equity for troubled banks in the face of extreme systemic crisis. from 7 to 22. odds are your financial reach would be considerably shorter than it is today. “There is a fundamental mismatch between financial innovation and the necessary infrastructure to support it. However. Trills Developed by Shiller and Stanford University economics professor Mark Kamstra. the acceptance of new instruments.T. Shiller is widely known for spearheading efforts to develop futures and options markets for single-family residences. Both of these recommendations appear to have been incorporated to some extent in the Dodd-Frank Wall Street Reform and Consumer Protection Act. “Crisis and Innovation.” FALL 2010 31 .” published in the spring 2010 issue of The Journal of Portfolio Management. the trill would be a share of a sovereign government’s gross domestic product (GDP). Laboratory for Financial Engineering – the creation of an agency of forensic-style analysts to investigate major events and financial failures. CME Group’s managing director of research and product development. The reality is that our globalized. 2010. many of them invented in the last generation. has “generally slumped in 2009. a periodic gathering of academics. no long-term. I think there would be a market for it. highly developed world is dependent on a cornucopia of financial instruments. Speaking at CME Group’s Global Financial Leadership Conference last year. Unless you were lucky in birth. Dodd-Frank era? THRILLS AND TRILLS Yale University economics professor Robert Shiller suggested a number of forward-looking ideas in his article. “I think we’re going to move in a more lateral direction for a while as the backlash from credit default swaps and the bailouts settles in to the broader financial community. He also recommended an idea first proposed by Andrew Lo. “So if you can get a certificate of deposit from a bank with a gold-linked coupon that has a floor and other protections.” DeWaal says. The trill would pay a dividend equal to one trillionth of the nation’s current year GDP and would be priced by the market.I. marriage or inheritance. Among his suggestions: Regulatory hybrid securities Developed by the Squam Lake Working Group. So what would successful financial innovation look like in the post-recessionary. thus providing banks with new capital – the result of not having to pay interest on the bonds – and averting government bailouts.IDEAS THAT CHANGE THE WORLD Imagine a world in which there were no automobile leases. which the government would sell as equities. And although no investigative units have been established by the Dodd-Frank Act. according to a recent CME Group report “New Product Success in Futures Industry. In the same period. Merton observed. one of world’s largest futures commission merchants and a leading multi-asset broker. Merton suggested that regulators require fair value accounting for the purpose of transparency. the development and launch of new financial instruments is accelerating.” CME Group more than doubled the number of new futures instruments it introduced last year. Eurex more than tripled its new futures products. “I would think by this point investors would be tired of their zero-percent returns in their money market accounts and their savings accounts. from 82 in 2008 to 188 in 2009. Even some of today’s most vilified instruments. In fact. such as credit default swaps. group general counsel for Newedge. which developed the report. sees a demand for commodity-linked deposit instruments in the near term.” FINDING ROOTS Resistance to new financial products also has deeper roots. these mortgages would reduce a homeowner’s principal in the event of a wide-ranging decline in housing prices. The requirement that most derivatives must be traded on public exchanges will establish fair value accounting for a whole new category of investments by setting daily market prices.

“There’s really never been true portfolio margining in the United States across multiple assets because of the bifurcation of the regulatory structure. and these are industrial sources of growth that we haven’t seen that much in past economic cycles. Nobel laureate and MIT professor. We also now have enabling covered-bond legislation.” Yago says. for delivery to be truly innovative.   Among its many activities. so products like covered bonds will probably gain traction. we don’t consider a very complex financial product that nobody can understand and that has no transparency or access to underlying collateral as a financial innovation. Robert Merton. like the complex mortgage-backed CDO. Leo Melamed. Executive Director of Financial Research. David Hale. or combining of assets in securities and futures accounts into one account. The award is named after CME’s former chief economist and senior executive vice president of planning and development. but all forms of securitization or structured products will have to have more flexibility than in the past. “At the Milken Institute. distinguished professor of finance from the University of Chicago Graduate School of Business. former president of the Federal Reserve Bank of Chicago. it must add value to enterprises and investors by lowering the cost and increasing access to capital.  It is the result of visionary people applying new ideas to real situations. whether they are securities or not.” BUILDING STRUCTURE Glenn Yago. is a flawed product that failed.” He is also hopeful that the definition of financial innovation itself will get a reappraisal. For a financial product. founder of Bloomberg LP and mayor of New York City. the award honors an individual whose innovative idea.   Past winners of the Arditti Award are Harry Markowitz. founder of financial futures and CME Group chairman emeritus. esteemed international economist. “Rather. and William Sharpe.   Members include Jack Gould. Gary Becker. or margin. product or service has created significant change to markets. Milken Institute DeWaal also sees market potential for instruments based on portfolio margining. Nobel Prize winner in economics. so I think there is quite an appetite for the higher yields of CLOs.   A major component of CFI is the Competitive Markets Advisory Council (CMAC). covered bond assets remain on the issuer’s consolidated balance sheet. To foster such ideas and their applications. However. applying the net assets of an entire portfolio toward the capital. Selected annually by members of the CMAC. executive director of financial research at the Milken Institute. and Robert Shiller. created in March 2004. commerce or trade. The bonds are similar to securities based on the securitization of mortgages.” Glenn Yago. CFI sponsors programs that explore the principles behind innovation and showcases their applications to a broad and diverse audience.” DeWaal says. “It’s very difficult to finance these industries solely through bank loans and expensive equity. such an instrument. and these are industrial sources of growth that we haven’t seen that much in past economic cycles. the duration risk and other elements are very specific to these industries.IDEAS THAT CHANGE THE WORLD Recognizing Innovators Innovation does not happen in a vacuum. “We just recently had the first couple of collateralized loan obligations issues since the crisis. Composed of leading financial experts. Michael Moskow. Eugene Fama.    The signature program of the CFI is the CME Group Fred Arditti Innovation Award.” Covered bonds are debt securities backed by cash flows from mortgages. CMAC explores and analyzes critical market issues. “I also think you’ll see more transparent mortgage products emerge again. who helped create Eurodollar futures.” Yago says. that is. CME Group founded the CME Group Center for Innovation (CFI) under the direction of CME Group Chairman Emeritus Leo Melamed in 2003. “The lengthy timeframes involved. industrial biotechnology. The Dodd-Frank Act allows portfolio margining. service.” Yago says. “The lengthy timeframes involved. foresees the return of structured products in the immediate future. process or organizational form. required for buying or selling equity-based financial products. Nobel Prize winner in economics. Michael Bloomberg. created to honor and promote innovation in action. biomedicine and other developing industries. Yago also sees a major role for structured products in the areas of clean technology. Nobel laureate and University of Chicago professor. Yale professor. the duration risk and other elements are very specific to these industries. former dean and professor from University of Chicago Graduate School of Business who serves as chairman.” 32 CME GROUP MAGAZINE . “But now some of the legal obstacles have been eliminated by Dodd-Frank.

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FALL 2010 35 .

cmegroup. July 2010 and August 2010.” says Sirois. FEDWATCH TOOL FOR IR TOOLBOX Fed Funds Futures Liquidity –Top of the Book Liquidity by Contract Month Fed Funds Futures Average Size of Best Bid/Ask. head of U. Other factors. as they have seen similar trends in Japan over the last 10 to 12 years. have served to support interest in CME Group Eurodollar futures and Federal Funds futures products. performs the calculation and updates every 10 minutes. Although changes in shortterm rates were affected by anticipated Federal Reserve policy actions. CME Group research shows liquidity in interest rates was down slightly in the second quarter of 2010 from very strong levels in the previous quarter of 2010. the market will likely see a significant flattening of the yield curve.  However. Volume in CME Group’s benchmark Eurodollar complex was up 39 percent through the end of May compared to the same period in 2009. a market maker in CME Group’s Fed Funds futures. CME Group launched a new FedWatch tool that calculates the rate expectations priced into any given Fed Funds futures contract. the majority of liquidity in Fed Funds Futures could be found in the near-term months: June 2010. interest rate movements were also impacted by changes in expected inflation. the specific sources of changes in short-term interest rate forecasts were difficult to identify because financial market forecasters relied on the yields on short-term Treasury securities as their benchmark. Until October 1988. Treasury refunding plans and other variables. Housing and Urban Affairs Committee on July 21. we’re rocking too. Mary Sirois. as well as new technology that allows for electronic trade of complex options trades and spreading. Because they have been low for so long. interest in the calculations has again grown due to continued economic uncertainty and the FedWatch tool was born. 2010. CME Group data showed that as of June 2010. including the implementation of market maker programs and new technology. It is all relative though. introduced just ahead of the April 28. Earlier this year. The FedWatch tool is available at http://www. Federal Open Market Committee trading/interest-rates/fed-funds. CME Group research shows that in the bigger picture.000 500 0 CME Group Federal Funds futures have become a favorite product of market participants wishing to hedge interest rate risk or get a read on near-term interest rate expectations.  A price quote in CME Group Fed Funds futures is 100 minus the average daily effective Fed Funds rate for the delivery month. He foresees a deflationary environment continuing through 2011 in the United States and believes the Japanese investor base is keen on the same deflationary theme. The futures markets also reflect those sentiments. These programs were put into play between 2005 and 2008.PRODUCT FOCUS While a zero-interest-rate monetary policy may have helped to get the economy back to its feet. expects that when the Federal Reserve begins to move. When Federal Reserve Chairman Ben Bernanke testified before the Senate Banking. The FedWatch tool.S. 2010 3. What happened in 1988 to change things? The 30-day Fed Funds futures began trading.” sending shock waves through the equity market. 2010.html Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 36 CME GROUP MAGAZINE . rates trading at Guggenheim Partners LLC. trading will become active in a number of contract prices. trading has been strong in short-term interest rate products. he told senators that the economic outlook was “unusually uncertain.Globex RTH June 1-30. “When the Fed’s moving. Many institutional investors currently believe the Federal Reserve will raise interest rates during the second or third quarter of 2011. Liquidity measures tend to focus on width and depth of market.000 2. Federal Reserve Chairman Ben Bernanke announced plans to exit this strategy. Market width may be quoted in ticks or in dollars for orders of a given quantity and market depth may be measured in contracts at different levels in the limit order book.500 1. Thomas di Galoma.000 1. It was in the 10 years that followed that the contracts really started to become widely used by market participants as a hedging tool and to get a read on near-term interest rate expectations. it left the short-term interest rate market flat on its back. And in the 30-Day Fed Funds complex futures were up 80 percent with options up an impressive 195 percent. Then in February 2010. CME Group Fed Funds futures were pricing in about a 76 percent chance of a 25 basis point hike sometime before July 2011. As of late July 2010. contends that there will likely be some pressure in front rate products going forward. Helping support liquidity in CME Group interest rate products were market maker programs implemented by the exchange.500 2. The change was attributed to the increase in volatility across many market classes during the second quarter as a result of the European debt crisis and concerns that a double-dip recession may be approaching.



“You need a pretty strong labor market to turn the situation around simply because that will create a little more growth and more final demand. even with several consecutive quarters of growth. but there appears to be a consensus among central bank watchers that there is not enough growth to alter the rate picture. that will keep central banks’ policy rates low. “Because the deflation risks are bigger than the inflation risks. forecasts low rates ahead with “central banks globally keeping policy rates at very low levels. unemployment at 9.5 percent.25 percent.INTEREST RATE OUTLOOK: LOW AND SLOW Interest rates may be at record lows. just up 1 percent or so.” Belton is not the only one who feels that way. in the midst of economic uncertainty in the European Union and elsewhere. Nonetheless.” “Mostly what is driving that is the slack built up in the recession and that slack is causing disinflationary pressures. economy. a fundamental driver of the U. is under pressure. “Right now. While the world economies have improved significantly since the darkest days of the crisis. Central banks responded to the 2008 market turmoil in classic fashion by slashing interest rates. most of that has been from inventory building. yet.” explains Lou Brien. the primary indicator has become monthly unemployment claims. but how fast and how dramatically is a matter of some debate. UNEMPLOYMENT LINES For Fed watchers. final sales are very lackluster.” Belton says. consumer spending. there are key factors to watch which may accelerate the rise of interest rates in the coming months. economic strategist at DRW Trading Group. Real. Despite some brief flashes – particularly when rising inventories boosted gross domestic product (GDP) to better than expected levels – interest rate futures at mid-summer at CME Group indicated that market participants are expecting rates to remain at current levels into 2011 and 2012.” FALL 2010 39 . Here is what leading economists see coming. rates sat unchanged for over a year. Terrence Belton. The question now. As the road to recovery continues. global head of fixed income strategy for JPMorgan Securities. is simply when will they head up again? In December 2008 the Federal Reserve shifted its target rate down to 0. followed in the spring of 2009 by the Bank of England at 0.S.S. interest rates may start to move at a different pace. its highest average since the 1982 to 1983 recession. With U.5 percent and the European Central Bank at 1 percent.

recovery is the fact that consumer indebtedness. look for the Eurozone to post GDP growth of 1 percent in 2010 while weakening again next year. says JPMorgan’s Belton. commercial paper and consumer debt-backed products means that institutional buyers of debt have had to turn increasingly to the U. “Consumer credit month after month has been declining also. unemployment is a top indicator being watched in the United Kingdom. “If consumers have more money in their pocket they are likely to spend. up from less than 80 percent at the beginning of last decade.” Taking that into account with unemployment and other factors means it is too soon to speculate when the Federal Reserve may raise rates.000 a month. Pond is not predicting a swift return of higher rates. however.5 percent has lagged behind the United States. which make up about 40 percent of the core consumer price index. he sees the 10-year U. a decline in mortgage-backed security creation. 40 CME GROUP MAGAZINE .” That has not happened in any of the major economies this time. keeping federal debt prices high.” Tyson says. have been rising even as federal data says they are not.” he explains. it compares well to the rest of Europe. it appears. while joblessness and consumer spending are factors in predicting rates.” Tyson says. AILING EUROPE Adding to the United Kingdom’s woes is the fact that a faltering Eurozone recovery will affect U. head of strategy for interest rate products at MF Global.5 percent for 2010 and 2011. there remain more troublesome concerns over the health of Europe’s financial institutions. Otherwise. Unfortunately. “Public sector job cuts will ensure that unemployment starts rising again which will maintain significant downward pressure on pay growth. Belton points out. Barclays Capital Contrary to some predictions that the trauma of the crisis and tighter credit would spur high savings levels.1 trillion). “The data. the effects of which are just starting to be seen in business and consumer activity. “With the boost in GDP from inventories likely to fade going forward. Treasury notes shifting into a higher interest rate range. “There is trend-like growth. “Household debt to income is now about 110 percent. Overall.3 trillion (£1. like Germany. Even if stronger growth emerges. Michael Pond. Adding to the concerns over the U. the first year out GDP grows twice that. others see tentative signs of growth and potential rate pressure. Pond says the federal survey lags reality on rents and equivalents by three to six months. director and interest rate strategist at Barclays Capital. says Phil Tyson.” “Recent industrial data has given the impression that recovery in the sector remains on track.” NOT SO GREAT BRITAIN As in the United States. Of some concern is that high consumer indebtedness may continue to cap spending even as joblessness improves. Tyson adds. “The Fed views inflation asymmetrically.” Pond says. U.” he warns.The overall global weakness further increases the likelihood that rates will remain low for some time. in the early 1980s. “They tend to be very patient when inflation is above their target and very aggressive when inflation is running below their target.” Brien says. Adding to expectations of improved spending and pricing power are indications through private surveys like REIS Inc.S. a world apart from today’s environment of what is effectively zero. is if jobless claims fall to the low 400. “One of the biggest factors that drives the savings decision is interest rates. rates ranged from 12 percent to 20. More likely to come from the Bank of England will be rate cuts to try firming the British economy’s unsteady legs. Pond believes spending will come faster than expected if the labor force strengthens.” he says. pressuring businesses there even more. but with little chance of Federal Reserve action on rates themselves. but it is not enough to remove the economic slack. you really need consumer spending to take over. For the European Union itself. less robust European economies will find any export boost hammered down by strict austerity measures. should benefit from a weaker euro. Even in such an environment. Pond argues.000 range in tandem with job creation rising to 200. For the European Union as a whole.” Michael Pond. showing a de-leveraging rather than a desire to increase the debt load. he explains.S.GLOBAL INSIGHT One sign that this path could be changing.K. the result will be no monetary tightening as GDP growth will be held to 1 percent to 1. mask growing divergencies within the region as a whole where peripheral economies are still lagging badly behind. But other. exceeds what the nation produces in a year. While the country’s GDP growth at a recent 0. he contends. meaning there is unlikely to be a burst in individual spending to infuse life into the economy. Still.5 trillion annualized rate.” Strong exporters. will support low rates for some time. falls on the bullish side. at $2. that rent and equivalents. Treasury market. “A good rule of thumb is that whatever you lost in GDP during a recession. Pond and others believe the Federal Reserve will seek to avoid repeating the Japanese stagflation errors of raising rates too soon in recovery. Tyson predicts. Keeping a cap on interest rates is what Brien terms “a flight to quantity. the United Kingdom may still take a turn for the worse before it gets better as “the massive fiscal squeeze – the most severe in the G-7 – starts to kick in. interest rate pressure low. At best. you really need consumer spending to take over. and in turn.K.” Belton says. With the boost in GDP from inventories likely to fade going forward. he anticipates little Federal Reserve rate action before the fourth quarter. adding that when consumers last had a high rate of savings.5 percent.K.000 to 300. By year’s end. And that. “If consumers have more money in their pocket they are likely to spend. this means inflation will hover close to zero for the foreseeable future while the European Central Bank continues to try and wrangle with serious sovereign risk and banking concerns while avoiding the very real risk of slipping back into recession. with the growth perhaps one-third of what would have been expected.” While federal debt issuance is running at a $1. exports.

Michael relies on the assurance — and innovation — of CME Group to protect and manage a $22 billion portfolio. With unparalleled liquidity. BlueCrest Capital Management. The Globe logo. Copyright © 2010 CME Group. COMEX is a trademark of Commodity Exchange Inc. Learn more at cmegroup. CME Group guarantees the soundness of every trade.A risk tamed is a reward captured. As founder of Europe’s third largest hedge fund. That’s why CME Group is where the world comes to manage risk. All other trademarks are the property of their respective owners. Chicago Mercantile Exchange. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. transparency and New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange Inc. NYMEX. CME Group is a trademark of CME Group Inc. . nothing reduces the threat of risk like CME Group. BlueCrest Capital Management For Michael Platt. E-mini and Globex are trademarks of Chicago Mercantile Exchange Inc. and the security of central counterparty clearing. M I C H A EL PLATT AD Founder. CME. All rights reserved.


FALL 2010 43 .

State capitalism is a system in which the state dominates markets. But the division between state-capitalist and free-market countries is not always clear. policy makers do not embrace state capitalism as a temporary series of steps meant to rebuild a shattered economy or to jump-start an economy out of recession. It is a game in which the referees have absolute control of every player’s every move. At this extreme. Second. There is no single model of state capitalism. state capitalists see markets primarily as a tool that serves national interests. countries that have only recently shed communism and embraced markets. It is little wonder. where personal. money. political and commercial interests are tightly inter- . In such a system. THE STATE-CAPITALIST CAMP There are two fundamental differences between free-market and state capitalism. Every country on Earth features both direct government involvement in regulating economic activity and some market exchange that exists beyond the state’s reach. power is an all-or-nothing proposition. and a tradition of secrecy and centralized control has shaped Russian political life for centuries. First. it is best to control both the referee and the strongest players. Faced with such a game. This organic relationship between state capitalism and autocracy is also visible within the Arab monarchies of the Persian Gulf. with absolutely no free-market activity. That said. Many of its practitioners came of age within authoritarian political and economic systems. goods and services from beyond their borders. and the outcomes of all the various political and economic games they play can determine their very survival. there is no government – and no other authority that can manage. On the far left is utopian communism. because even in the most tightly controlled state. which some call anarcho-capitalism. but for its own purpose. but for its own purpose. regulate or interfere in any way with the operation of markets. black markets generate supply to meet demand. On the far right is utopian libertarianism. rather than as an engine for opportunity for the individual. It is not simply communism by another name or an updated form of central planning. people. It is a game with no referee. and the degree of government intervention within each country fluctuates over time. At each end are the ideological extremes of a state’s role in an economy. though its leading practitioners share a well-developed sense of risk aversion. primarily for political gain. The illustration above will help put state capitalism in context. It represents what we might call the entire market spectrum. they would try their best to control these processes – and to carefully micromanage the risks they create. It is no accident that the two most internationally influential of them are China and Russia. It embraces capitalism.GUEST COLUMN WHAT IS STATE CAPITALISM? State capitalism is not an ideology. The extreme has never existed. State capitalists use markets to extend their own political and economic leverage – both within society and on the international stage. information. There is no iron curtain separating the two sides neatly into opposing camps. Fear of chaos long predates communism in China. 44 CME GROUP MAGAZINE It is a strategic long-term policy choice. there are crucial differences among countries in how their governments regulate commercial activity and in their power to extend their influence. No country’s economy is either purely state capitalist or purely free-market driven. or at least those of the ruling elites. that when governments in Beijing and Moscow finally decide to welcome the increasingly free flow of ideas. It is not simply communism by another name or an updated form of central planning. then. It embraces capitalism. State capitalism is not an ideology. where governance is the art of risk management.

Develop- Even if state capitalism is not around a century from now. international investment in the developing world has slowed considerably during the crisis. but eventually perhaps the security of the world’s freemarket democracies. for example. particularly in China. not the state. at least on a relative basis. must be the primary engine of economic expansion if growth is to be strong and sustainable. The U. Countries like state-capitalist China (and those with a relatively smaller stake in international trade. but it provides a wider social safety net when things go wrong. Outside of these exceptions. The risk for the United States – and for free-market democracies generally – is that distortions created by state capitalism will ensure that the pie is not expanding quickly enough to accommodate all the new mouths it will soon be expected to feed. it favors safeguards for workers over protections for employers. 2009 figures were expected to fall to $165 billion. In 2008.MARKET SPECTRUM Command economies Free-market economies Utopian communism State capitalism Free-market capitalism Utopian libertarianism woven within royal families. The former recognizes that government can help enable growth. and Washington has seen its great-power advantages begin to shrink. the financial crisis and the global recession have ensured that it will enjoy many more years of robust health. state capitalism limits the global free market system’s productive potential. In 2008. For all the reasons outlined. ing states that opened themselves to trade and foreign investment took an especially tough hit. With mercantilism a thing of the past. That will threaten not just standards of living. and large numbers of immigrant workers have returned to their home countries. continued to invest. This can slow growth rates over time.” these and other developing states have cut into U. FALL 2010 45 . the two models share a core assumption: that the private sector. Meanwhile.S. The willingness of politicians in a growing number of developing states to gamble on greater openness to foreign trade and investment has brought hundreds of millions of new players into the global economy. American-style free-market capitalism and the idea of globalization have taken plenty of blame for the meltdown. Relatively speaking. emerging markets took in $461 billion in net positive capital inflows. while those like India. That is why it is important that those who believe in free-market capitalism continue to practice what they preach. protectionism has intensified. national oil and gas companies and emerging-market-based sovereign wealth funds accounted for a record 15 percent of global mergers and acquisitions and six of the 10 largest asset deals. political. economic and cultural hegemony over the past several years. With the “rise of the rest. America might still hold a somewhat smaller piece of a much bigger pie./Anglo-Saxon model grew from mistrust of any system that gives government too much power. It is also visible in energy-rich authoritarian states like Iran. A February 2009 World Bank report estimated that 53 million people in emerging-market countries would slide back into poverty over the course of that year. while the latter asserts that government-managed growth can further empower government. The European social-democratic model relies more on the state as guardian of the rights of the individual. the financial crisis and the global recession have ensured that it will enjoy many more years of robust health. If all these emerging powers embrace free-market capitalism. The end of the Cold War and the growth of emerging-market states like China. state capitalists.S. Trade barriers have risen. few now doubt that commerce can generate new wealth and expand more than one economy at a time. India. Yet the difference between free market capitalism and state capitalism is a fundamental one. Brazil and others have created new opportunities for precisely that kind of mutually profitable exchange. There is more than one model of freemarket capitalism – and Americans and Europeans often argue over the relative merits of their own versions. Different as they are. like India and Egypt) have taken a much less severe hit from the slowdown than free-market powers in America and Europe. Poland and Egypt that are less dependent on crossborder financial flows weathered the storm with fewer lasting problems. it can compromise a country’s security and the future of the global economy. Venezuela and others. THE CHALLENGE Though state capitalism’s challenge to free markets will not generate the drama of the Berlin airlift or the Cuban missile crisis. Russia. Even if state capitalism is not around a century from now. As of this writing. The Western financial crisis and global recession have left champions of freemarket capitalism facing an increasingly skeptical international audience.

RSJ 46 CME GROUP MAGAZINE . KAREL JANECEK Chief Executive Officer.Photo: Ondrej Host / Filmservice a.s.

high-speed market making firms. they likely would not mention the name RSJ. How the trading world has changed. FALL 2010 47 . But this Prague-based firm has quietly risen to be among the top volume participants at CME Group.When traders think of cutting-edge.

” RSJ sees no need to open offices in other locations around the world. The firm outsources a fair bit of its operations to stay lean and focused on trading and making markets. it became a fullequity member of CME and began making markets in Eurodollar futures the following year. “The system is still working today. “When people read and hear about RSJ and the successes they have had.” says Janecek. and the more global the business has become. “Then we began to develop software for automated trading for market making. programmers and traders who monitor the markets.” Janecek says.” Chart says.” In an example of how global financial markets have evolved in recent years. from 11. physics or in computer programming. “When we speak about Eastern Europe. But that was when electronic trading was still in its relative infancy.” 48 CME GROUP MAGAZINE . telecommunications and technology are ever-evolving. New York and London to stake their claim in the financial markets. head of the professional trading group business in Europe and the Middle East at Newedge Group in London.9 million contracts in the second quarter 2010. based on current open positions. where virtually all of its mathematicians. RSJ was launched as a small stock trading operation in Plzeň.” Newedge’s Chart says that RSJ serves as a good example of the potential for the Central and Eastern European region.” Chart adds that the technology improvements and incentive programs for proprietary trading firms and hedge funds by CME Group have also played a large part in bringing in firms like RSJ.” says Chart. Today the firm is the largest proprietary trading firm in the Czech Republic and ranks third among CME Group market participants in terms of volume traded on the exchange.” Chart says. “Historically. Founded in 1994 by Karel Janecek. so we don’t actually need experienced traders. Instead. “And we do have very talented. or the fastest. as opposed to remaining in their own domestic markets. But in futures. We need people to learn the way our systems work. And they know how to behave accordingly. because our trading is based on very complicated modeling. it’s an advertisement to other smart intellects who might want to write their own algorithm. what helped us get where we are and our biggest competitive advantage. “There are going to be local people who are born and educated within Central and Eastern Europe. RSJ reported that its trading volume on CME Group had more than doubled. “Technology is important and we don’t want to be too slow.” FINDING TALENT RSJ’s trading models are all mathematically-based and developed in-house. “But it is not so important that we have to be first in line. and then using the technology such as co-location. It also is among the top three in Eurodollar futures volume. Despite its singular focus on algorithmic trading. Janecek says the talent pool is deep in the Czech Republic. firms in that region weren’t well known. In 2008.” RSJ adapted to the new high-speed markets and. Most of his 44 staff members have master’s degrees or doctorates in mathematics. It used to be ambitious and bright individuals would journey to financial hubs in Chicago.” Janecek says speed has been more important in the stock market where multiple exchanges compete for volume on the same listings. who will look toward these firms like RSJ.CUSTOMER CONNECTIONS The interesting thing about today’s global markets is that the new big players are coming from locations never imagined. we’d be quickly out of business. where contracts are often exclusive to that exchange. The designation gave the firm better access to CME Group products and opened the door to trade much more volume. “The level of talent is similar everywhere. and in 2004 making markets. Over the past year. “Almost all of the people we hire are recent graduates from college. The firm is looking to add commodity markets as well. RSJ’s story illustrates just how a confluence of technology. Janecek’s relatively small group became a market maker at CME Group in Eurodollar futures and the E-mini S&P 500 index futures. strategy is key along with solid risk management methods. “We started trading in the derivatives markets. the firm’s first priority is on building trading models that find various opportunities that are not obvious within the markets they trade. high quality people here. Prague looks like a pretty good base to continue working from. a town better known for its beer. Today. weren’t well regulated and it was also difficult for them to get credit lines and be onboard with Western institutions. By 2000. doing carry trades on the yield curve through short-term interest rates on a trading program I created. all our systems know what our risk is. “Years ago.” Janecek says. the firm was based in Prague and began trading futures in Europe. In 2001 and 2002. firms like RSJ in Prague are making a name for themselves. who act as their leaders or beacons to follow. Andrew Chart. developers and programmers who understand mathematics.” Janecek says. What is most important then is the modeling. the more recognized these firms have become. Czech Republic. was very well done risk management. with an early focus on energies. No longer.” Janecek says.7 million contracts in the third quarter 2009. “We were lucky. With the growth of electronic markets and the ease of access to electronic trading engines such as the CME Globex electronic trading platform.” Janecek says. But for firms in the region. Instead the firm uses co-location services in Chicago. says firms like RSJ have been brought into the mainstream derivatives space. Janecek says that speed is not the main element to its trading philosophy. “And that makes the markets more accessible as telecoms improved. And at each moment. in 2007. come from. not a revolution. It is also looking at Asian markets and is considering a push into equity markets in a few years. where he teaches a graduate-level course in financial mathematics. by the continuous upgrades to trading engines and networks by exchanges. As RSJ continues to look at the global market. RSJ performed its trading manually on other markets. who has been working in Central and Eastern European regions for Newedge for 11 years. who also serves on the faculty of Charles University in Prague. as well as the ongoing telecommunications infrastructure improvements within some of these countries. “We trade intra-day. it’s been an evolution. “Very important skills sets for us are first mathematicians.” RSJ does not plan to stand pat with its operations or its focus on financial markets. infrastructure and talent is shaping the futures industry. “That’s changed. to 26. London and Frankfurt.

Time to settle some differences Bringing fair and transparent energy trading to the Middle East and beyond .


Korea Exchange takes another international step forward. Now with its partnership with CME Group. FALL 2010 51 .KOREA EXCHANGE GOES INTERNATIONAL Korea Exchange is one of the largest derivatives exchanges in the world. Its flagship KOSPI 200 futures and options are two of the most liquid index contracts in the world.

In July 2010. they are a cultural phenomenon. managing director of Newedge’s Korean business. products and distribution networks. Another five Korean firms currently offer or are planning to offer access to CME Globex to customers.S. While the bill still requires approval from the National Assembly’s Legislation and Judiciary Committee before taking effect. Korean Treasury bond futures as well as single-stock futures. which historically have turned out to be key boon factors for South Korean exporters. has been the most actively traded derivatives product in the world for years. KRX was formed in January 2005 by the consolidation of the Korea Stock Exchange. Sun-Bong Kim. according to Futures Industry Association figures. Seok Yun. Korea Futures Exchange and Korean Securities Dealers Automated Quotations. The index is indicative of the top 200 stocks at KRX. To attract more international participation. TAX ISSUES The KOSPI 200 success story is often painted as one driven by an unusual level of retail interest and indeed retail clearly has a big part to play. But KRX would like to see more international trading from institutional players. after Korean hours. This success comes from an exchange that has been in existence for just five years. traders are concerned. subject to regulatory approvals. up 28 percent from a year earlier. Launched in November 2009. “Slapping a tax on futures and options trading would increase costs. CME Group and KRX are also planning to add a two-way order routing system. the former president of Kiwoom Securities. expects corporate profitability to remain high and the market to remain strong well into 2011. listed derivatives versus equities. Korean Treasury bond futures as well as single-stock futures followed in 1997 by the options product. The KOSPI 200 is far from KRX’s only success story. KRX is the world’s largest exchange. Together.” Yun says. Last year. Credit Suisse and Merrill Lynch began offering access to after-hours KOSPI 200 futures on CME Globex while a third.PARTNER TIES The KOSPI 200 index contracts are not just any derivatives in Korea. Following a proposal from the ruling Grand National Party in August 2009. MARKET ACCESS more than 33 percent of trading volume in the KOSPI 200 futures and options. Average monthly trading volume for the KOSPI 200 futures in the first half of 2010 totaled well over 7 million contracts (see chart). became KRX’s chairman and chief executive officer. joined them in August. Its business is split about 50/50. economy continues to steadily improve and commodity prices have been stable. KRX partnered with CME Group to offer KOSPI 200 futures. existing KRX clearing members are able to access after-hours CME Globex trading in the contract via the Korean exchange’s Unified System for Global Trading.01 percent. on the CME Globex electronic trading platform. Headquartered in Busan. head of research at the Korean operation of Credit Suisse. something that Koreans are rightfully mindful of. In recent years. legislators have agreed to impose a tax on derivatives. Newedge Group. including futures and options. Its counterpart. the future is not cloudless for the Korean futures and options business. the KOSPI 200 contracts are among the most dynamic index futures and options contracts in the industry. Few products combine widespread retail liquidity with institutional interest to such a successful extent. forcing many investors to leave the market and driving down trading volume. the exchange has been working with a variety of Asian and global exchanges such as CME Group on technology. Given the larger size of the futures contract. “The product is like cultural heritage.” says Kevin Lee. that equates to nearly 40 million KOSPI 200 options in cash value. 52 CME GROUP MAGAZINE Apr 10 . Korea Exchange’s (KRX) KOSPI 200 futures contract was among the leading stock index futures contracts in the world in 2009 with a total volume of more than 87 million contracts traded. based on 2009 volume. Kospi futures was launched in 1996 with options the following year. The exchange also has thriving markets for currency futures. “The U. The partnership now provides a global distribution network for the KOSPI 200 futures as well as virtual 24-hour access to the contract. KRX says that offshore firms represented However. from 2013 with the basic rate to be set at 0. Analysts say there are compelling reasons for wanting that exposure. which Koreans should be proud of. KOSPI 200 INDEX MONTHLY VOLUME IN MILLIONS OF CONTRACTS TRADED 10 9 8 7 6 5 4 3 2 1 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 The exchange also has thriving markets for currency futures.” argues Lee. KRX figures show about 30 percent of total volume in KOSPI 200 futures contracts comes from retail market participants with the options-specific market share likely to be somewhat higher. The KOSPI 200 products have been growing since the futures contract was first launched by the Korea Stock Exchange in 1996. the KOSPI 200 option. In 2010. A similar agreement between CME Group and BM&FBOVESPA helped boost international volume on the Brazilian market substantially and today accounts for more than 25 percent of trading on its stock index futures. KRX’s success reflects a regional trend in which Asian listed derivatives volume grew nearly 25 percent in 2009 while volume at European and North American exchanges fell. The KOSPI 200 index was first published by the then Korea Stock Exchange in 1994.



it is no surprise that more trading firms are using market surveillance technology to help them keep a closer eye on traders.G O T A N E Y Y O E O U At a time when traders may be feeling more pressure than ever to boost returns and the prevalence of electronic trading is hastening already fastmoving markets. N FALL 2010 55 .

trading firms are not alone. says firms focused on energy trading. industry insiders believe that forthcoming regulations will drive it to expand even faster in months to come. with the intention of creating a misleading appearance of volume. The intention is to create a false or misleading appearance of demand for a contract. which Nasdaq OMX Group announced it will acquire in the third quarter this year. “Defining and identifying the various forms of order book manipulation has had some scrutiny of late. are facing more pressure and prescriptive rules to filter out bad wash trades. the firm’s market surveillance system for brokers. firms are now protecting themselves against potentially manipulative or unethical trading activity using technology that tracks even the subtlest of schemes.5 million (€101 million) in 2012. Market surveillance technology. who have been more aggressively pursuing market manipulation over the past couple of years. ROOTING IT OUT In the past. With such intense competition. making that segment and trade processing their biggest spending priorities. Karbouris adds that SMARTS. and therefore demand.” 56 CME GROUP MAGAZINE . director and global head.” says Michael Karbouris. whereby a trader layers the order book on one side of the market. “The new financial reform act is going to impose many more routinely identifies other common market manipulation scenarios such as marking the close and wash trades. RedKite Consulting and SMARTS Group. reported that Europ-ean brokers would increase spending on surveillance systems by 15 percent per year – up to $131. in the order book. Recent focus in this area has been on layering of the order book and another scenario called spoofing. Why? In today’s market. Karbouris shares some order book manipulation scenarios that are monitored by SMARTS.S. Layering of the order book is a trading pattern whereby multiple orders are placed at various price levels on one side of the market without intending to actually trade. “And regulators promulgate through enforcement.3 million (€84 million) in two years. Seven of the country’s top 10 investment banks use NICE Actimize surveillance technology. which Tabb Group projects will hit $113. winning and losing trades are often the difference of milliseconds.CUTTING EDGE The complexity of today’s trading is creating more opportunities for firms like NICE Actimize. both in terms of broader usage and greater sophistication. commences the execution of trades on the opposite side of the market and then soon after removes the ‘layered’ orders from the order book. Indeed. research firm Aite Group noted in a recent report that. is becoming commonplace with trading firms to track their traders’ and customers’ dealings. These firms offer systems that can look for even small irregularities throughout the trading process and across a range of variables. market surveillance solutions are becoming more popular among trading firms seeking to not only keep brokers in line but avoid fines that can result from even the appearance of lax monitoring and compliance. RedKite Consulting and SMARTS Group… These firms offer systems that can look for even small irregularities throughout the trading process and across a range of variables. many trading firms and exchanges relied on their own in-house solutions to monitor potential wrong-doing. managing director of securities markets products at NICE Actimize. And while market surveillance technology has progressed greatly. According to Karbouris. “Trading firms have the duty to supervise their employees and monitor the customers to whom they grant But the complexity of today’s trading is creating more opportunities for firms like NICE Actimize. and identify where patterns of these scenarios are developing over time. Europe and elsewhere. U. financial firms are increasing spending on risk management technology. strategy and technology initiatives at CME platform also identifies subtle combinations of layering and spoofing. a financial markets research and consulting firm. U. despite significant cutbacks in information technology spending in many segments. trading firms that want to apply best practices are increasingly investing in surveillance systems to examine client activity for potential violative trading.” Heinzman says. “They have a big stick and they use it. “In addition to risk management.” Hence. “The trend will accelerate. head of SMARTS Group for the Americas. You don’t want to be the firm that gets a $300 million fine.” Heinzman says. That is faster than the 11 percent annual rate that European exchanges or multilateral trading facilities are expected to increase their spending on market surveillance technology. in particular.” Heinzman says he has had “a number of commodities market-making firms become our customers” in recent months to protect against the potential regulatory and reputational damage if they miss a manipulative incident. Tabb Group. which can be filtered to identify only those wash trades exhibiting bids and asks that originate from the same office or desk.” says Jim Moran. long used by regulators and exchanges to monitor trading.S. Jim Heinzman. the SMARTS. Spoofing occurs when a trader enters a large order close to priority bid or ask and then within a short period of time deletes it. A strong driver of this trend comes from regulators in the United States.


There are clay tile floors in the entry foyer. an abundance of wildlife. Fireplaces are in the dining room. dining room. stonework. the main house is well suited for gracious entertaining with expansive living spaces including an impressive 1000 square foot vaulted living room with fireplace.000 Eagle River Wisconsin Frank Lloyd Wright inspired new construction with 103 feet of sandy frontage on Planting Ground Lake. tile and oak floors. The screened porch off the master suite faces the lake. master bedroom and on the outdoor patio.000 For more information please contact Kurt Penn: Phone 773-206-0302 or email kurt.300. the world’s largest inland chain of fresh water lakes. the largest and deepest of the 28 lakes of the Three Lakes and Eagle River Chain of Lakes. This prairie style home is truly an architectural gem. $1. Ideal for entertaining indoors and out.950. there’s a beautiful cedar and stone fence with a moderate slope to the lake and private dry boat house. The 3+ car garage has additional storage. A truly lovely master suite features a sitting area with a wet bar and fireplace. this exceptional 5800+ square foot home is situated on 8. an incredibly diverse forest. Suitable for year round living.Elm Grove Wisconsin Return to a bygone era of elegance and refined living in a meticulously restored and expanded classic 1920’s English Country Estate which has been adapted for contemporary living. this spectacular home is situated on over 3 professionally landscaped acres in the prestigious community of Elm Grove. ornamental ironwork. $4. The finest materials blend seamlessly with vintage period features such as leaded and stained glass windows. $3. 3.5 baths and attention to detail throughout. The spacious master suite has another stone fireplace and the sumptuous master bath has both a whirlpool & steam shower. There are original & restored prairies.695. this property is also ideal for a family compound with a 900 square foot guest cottage. a corporate retreat or getaway. antique and boutique shops. The lower level provides separate 2 car and 3 car garages with a doggy shower in the mud room.penn@sothebysrealty. With 4 bedrooms. yet is fully suited to today’s modern living. 3. an 850 acre chain of 4 interconnected spring fed lakes. four season room and library.8 wooded acres with 1200 feet of frontage on Long Lake and Lake Buteau. with a firebox dating to the 1500’s. $1. lighting fixtures and walnut paneled dining room. The great room has a soaring cathedral ceiling and massive stone fireplace. On almost 2 acres of land. this offering represents an opportunity to own a secluded nature preserve less than 2 hours from Chicago.250. golf. library. yet 15 minutes north of Lake Geneva with its wide array of fine restaurants. as does the large deck. Enjoy the outdoors on several large Ipe decks. game room.5 bath home incorporates vintage architectural features and characteristics. especially the walkout garden level . and more. & a private inlet with a stunning peninsula that the Wisconsin Department of Natural Resources has called “the most pristine undeveloped shoreline in Southeast Wisconsin”. This property has a wide variety of hyperbolic buildings & cabins with accommodations for numerous guests. The 4th bedroom currently serves as an exercise room. just minutes from Rhinelander and Tomahawk. This incredible 3 bedroom. There are panoramic views of the woods and water from every room.800 feet of water frontage available for purchase separately. just minutes from Milwaukee. This truly exceptional property is remote enough. spas.000 Elkhorn Wisconsin Nestled in the rolling terrain of Southeast Wisconsin. is a rare find of 80 private acres of kettle moraine land and over ½ mile of pristine frontage on Lauderdale Lakes. Additional 26+ acres with 3. Ideal as a family compound.000 Harrison Wisconsin At the gateway to the North Woods in beautiful Harrison Hills.

CME Group’s contract allows market participants to gain more direct access to benchmark prices with virtually no foreign exchange risk and take advantage of new spreading opportunities with existing soybean oil trading/commodities/grain-and-oilseed/ crude-palm-oil-futures.S. and potential opportunities. a secure.0. a single SMART Click username can be given access to content from multiple clearing firms and usernames can be kept even if they change clearing firms. the conference focused on commodity markets.cmegroup. Settlement prices for the new electronically traded futures contract are based on Bursa Malaysia’s crude palm oil futures. Now users will only have one username and password to remember for all SMART Click enabled systems. the Wharton Hedge Fund Conference was held at CME Group New York offices. CME Globex Credit Controls and Clearing Firm Administrator Dashboard. CME Group launched crude palm oil futures contracts in late May. Portfolio managers at commodity and global macro hedge funds provided insight into the state of the commodities market. Co-hosted by the Chicago Booth Hedge Fund Network. dollar-denominated contract is equivalent to 25 metric tons of crude palm oil. Simplify It CME Group now offers customers the SMART Click tool. University of Pennsylvania alumni active in the greater hedge fund community. U.html. More information on Crude Palm Oil futures is available at http://www. Each cash-settled. Users can easily maintain their own contact and profile information without any paperwork involved.CURRENT PULSE In the Palm of Your Globex With its strategic partnership agreement with Bursa Malaysia Berhard (Bursa Malaysia). web-based interface that manages multiple accounts with CME Group systems such as FirmSoft 6. Additionally. prospective trends. FALL 2010 59 . Palm oil futures provide a trading instrument for the massive market in crude palm oil. Wharton Hedge Fund Conference In June. The Wharton Hedge Fund Network brings together Wharton Business School. the global benchmark for crude palm oil pricing. the world’s most consumed edible oil. and the systems’ access is simplified.

Throughout the transfer process. CME Group managing director of energy and metal products. RNK Capital. national. Credit Suisse Energy. And it displays the people and products involved with this story using the company’s extensive archives.S. Brochures illustrating the exhibit’s imagery and story are also available in the public visitor center. owners of the Green Exchange Holdings LLC include Constellation NewEnergy.CURRENT PULSE Calgary Connection Recently. More information about CME Group’s Canadian energy contracts can be found at http://www. and many CME Group clients are involved in the Calgary market.” says Joseph Raia. “As demand for oil and natural gas grows. Goldman Sachs. TFS Energy. CME Group opened a sales office in Calgary. Morgan Ventures Energy.P. Tudor Investment and Vitol. innovation. The Story of Innovation The story of CME Group is now on display at the CME Group headquarters on the executive floor corridor. to focus on Canada’s energy market participants and education. Evolution Markets. 60 CME GROUP MAGAZINE . and international markets. The historical exhibit depicts the collective experience of predecessor institutions. CME Group’s Calgary office can be reached at (403) 444-6876. technology and the global economy for more than a century. waiting area and conference rooms. Western Canadian crude oil has been a key resource for the United States for many years. “CME Group’s Calgary office will allow us to be closer to this market and to work more closely with them to better serve their needs.cmegroup.” The opening is particularly timely with the launch of CME Group’s Western Canadian Crude contracts in July 2010. NOX. received regulatory approval as stand-alone market in July 2010. J. In addition to CME Group. Contracts on emissions allowances and credits in CO2. ICAP Alberta. the Green Exchange will continue to develop additional products for launch in an effort to focus on the needs of evolving regional. The exhibit illustrates the role CME Group has played in the growth of global commerce. Spectron Energy. so does the need to mitigate risks associated with these products. Green Light Green Exchange LLC. including the U. Morgan Stanley Capital Group. compliance market. and SO2 will be transferred to the Green Exchange but will continue to be listed for trading and clearing by NYMEX until the process is complete.

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It benefits the entire community. cardboard and steel have been sorted and recycled to date. allowing power to be distributed at a much higher voltage.” During the winter months.” One element is the data center’s 130.S. we allowed a large amount of space for expansion. more than 3.” says Panfil.” 62 CME GROUP MAGAZINE . such as evaporative condensing and heat recovery wheels. DC3 was also built with customer service in mind.AT YOUR SERVICE FINDING GREEN IN UNEXPECTED PLACES In today’s carbon conscious world.600 tons of concrete and roof gravel were reused during DC3 construction.640 tons of carbon dioxide emissions. reducing energy consumption more than 35 percent of the year. DC3 provides critical support to all internal and external business systems. “Additionally. construction and operating practices. The result is an industryleading union of technology and environmental sustainability. sustainability was the focus of three core areas: data center design. “We were also able to salvage 17 mature trees from the data construction site. with better efficiency. managing director of enterprise technology services at CME Group. CME Group’s new data center. This brings a higher level of excellence to our customers in the form of reliability and performance.” says Joe Panfil. This will permit us to grow as needed to accommodate our global customers. flexibility and environmental sustainability. In planning and building out DC3. CME Group’s green construction practices include reducing waste and recycling materials. thus DC3 is the first CME Group data center with its own power substation. “Green efforts are usually cost effective. and they have since been replanted along the data center’s south boundary. 1. Additionally. Information Technology is focused on doing much more computing using far less energy.” Panfil says. allowing power to be distributed at a much higher voltage. allowing the chiller’s compressor to be shut down. DC3 is the first CME Group data center with its own power substation. being environmentally sustainable is equally important. For example. Environmental Protection Agency waste reduction model. clearing and regulatory and provides continuous power and cooling to these systems. “We attempted to extend green practices into everything we did. While green practices have obvious benefits. according to the U. flexibility and environmental sustainability. is the size of four NFL football fields and just as green. This translates into a saving of 4. The DC3 operating practices strive to improve energy efficiency of electrical and mechanical equipment. with better efficiency. DC3 is adopting other technologies. “We built the new data center using knowledge from previous builds and augment them with the latest technology in the industry. lowering cooling costs. DC3. which dramatically reduces roof surface temperatures. CME Group has certainly followed that plan.100 yards of construction debris. but as a corporate citizen.000 square foot reflective white roof. to promote “free cooling. We stored them at a farm during construction. including CME Globex. the outside temperature can cool a chilled-water system.

The Global Solution The Global Solution 30 30 CELEBRATING THIRTY YEARS CELEBRATING THIRTY YEARS .cqg.

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