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Issue Ten
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5 SPRING 2008
8 Global Insight 6 From the Top
A letter from the CME Group
executive chairman and CEO
41 Cutting Edge
Gaining Exposure
to the Credit
Derivatives Market
The strategic acquisition
of CMA, a leading provider
of market data, opens new
opportunities for CME Group
12 Guest Column
The Financial Crisis:
Does the Road to Global
Serfdom Lie Ahead?
Bernard Connolly predicted
the collapse of the global market
boom in our spring 2007 issue.
He explains why he was right
– and the implications
38 Current Pulse
U.S. Secretary of Agriculture
visits CME Group • NYSE
Euronext to purchase metals
complex • A new source of
information • Survey provides
insights on FX trends •
Nonfarm payroll futures
launch • CME Group
earns top honors
42 Industry Connections
Insight for Tomorrow
As change accelerates,
CME Group plans to host
a new forum for financial
industry leaders to discuss
trends in global finance,
politics and business
16 Partner Ties
20 Cover Story
26 Market Efficiencies
34 Product Focus
CME Swaps on Swapstream –
Efficient and Effective
Soon there will be a better way
to trade interest rate swaps
Clearing the Way
A new look at the futures industry’s
longstanding model: centralized
clearing, where futures exchanges
around the world operate their
own clearing houses
30 At Your Service
Two Legacies Under One Roof
Blueprints. Timelines. Meetings.
Now the Chicago-based futures
pits are operating in a single location
for the first time in 100-plus years
Michael Bloomberg:
Inspiration for Innovation
As someone who brought
groundbreaking change to financial
markets, Michael Bloomberg offers
his perspective on innovation
U.S. Grain Contracts Tap
Benefits of CME Globex
Grain contracts traded at the
Minneapolis Grain Exchange,
Kansas City Board of Trade
and Chicago Board of Trade have
come together on CME Globex
The Hunger for New Solutions
The daily headlines discuss rising
food prices and resulting unrest.
Noted economist David Hale looks at
why this is happening and the forces
reshaping global agricultural markets
Issue Ten
Craig Donohue (left) and Terry Duffy (right).
7 SPRING 2008
Executive Chairman
Chief Executive Officer
CME Group has never been known to avoid tough subjects. In this edition of CME Group Magazine,
we take a closer look at a number of the challenging issues our global economy is currently facing.
Those of you who have been reading our magazine for a while may recall our spring 2007 cover
story, “Collapse of the Global Boom?”by Banque AIG’s Global Strategist Bernard Connolly. Written at a
time when most markets were still buoyant, Connolly presciently outlined the economic problems that
were on the horizon. Now that the credit bubble has burst, we have invited Connolly back to provide his
thoughts on the current state of the financial system and global economy.
In the wake of the subprime meltdown and credit crunch, concerns about counterparty risk
have grown. This has turned the spotlight on the role of clearing houses like CME Clearing and revived
the periodic debate about whether the derivatives industry is best served by an exchange-owned or a
utility clearing model. In our view, the derivatives market has been well-served, both in terms of risk
management and product innovation, by the exchange-owned model. “Clearing the Way” takes a
closer look at the critical factors involved in this debate.
World commodity markets are facing unprecedented volatility and all of us are experiencing
the shock of rising food prices. As is often the case, the issue is far more complex than simply rising
demand and falling supply. In “The Hunger for New Solutions,”international economist and CME Group
Center for Innovation advisory council member, David Hale, examines various forces at play in one of
the most important global food markets – grains and oilseeds.
As participants in a global economy, it is important to understand the trends that directly and
indirectly affect our markets – and our lives. With that goal in mind, we are hosting our first-ever Global
Financial Leadership Conference in September. It will provide an opportunity for leaders in our
industry, as well as the broader business and political communities, to discuss vital issues in today’s
increasingly challenging environment. We look forward to sharing highlights of the conference with you
later this year.
The impact of rising food prices is of global concern. The United
Nations considers “food insecurity” to be a major emerging risk of
the 21st century. According to the World Economic Forum’s Global
Risks 2008: A Global Risk Network Report, food prices in 2007
increased 17 percent in China, 4.7 percent in the United Kingdom
and 4.4 percent in the United States. The core of the solution is to
grow more food.
Supply and demand issues have affected the markets as long
as markets have existed. What is noteworthy now is that tradi-
tional supply issues are the most severe they have been in some
time, while, simultaneously, demand is increasing. The result is
a one-two punch for prices.
The worldwide grain trade represents a classic example of how
supply and demand shape markets. Fundamental supply issues,
including weather – witness the recent catastrophic flooding in
Iowa and other Midwestern states – and export policies are push-
ing up prices. At the same time, increased demand is coming from
emerging markets, with more corn diverted to the creation of bio-
fuels and fewer soybeans planted as farmers turn to corn as the
grain of choice. Also helping push up prices is the declining dollar,
which makes dollar-denominated products look like attractive
buys, and fuel prices, which are running up the cost of fertilizer
and distribution.
The result? Global grain stocks are declining, placing greater
pressure on prices. According to the International Food Policy
Research Institute’s 2007 report, The World Food Situation: New
Driving Forces and Required Actions, wheat and corn production
decreased 12 to 16 percent in the United States and United
Kingdom between 2004 and 2006. Cereal stocks in China, which
constitute approximately 40 percent of total stocks, declined sig-
nificantly from 2000 to 2004 and had yet to recover in 2007.
For most observers of the grain and oilseed markets, climate is
among the biggest factors causing declining global stocks of grain.
For example, due to drought, the Australian wheat crop produced
only 12.7 million tons in 2007-2008 and 9.7 million tons in 2006-
2007, compared with 25 million tons in 2005-2006, according to
the Australian Government’s Department of Agriculture, Fisheries
and Forestry.
Some crop experts also cite “carbon fertilization,” the idea
that plants grow faster and larger as they absorb the atmosphere’s
increased levels of carbon dioxide. This can result in higher pro-
duction for crops such as rice and soybeans, but not necessarily
for corn, sugarcane and other crops because of temperature and
other factors.
On the other side of the supply-and-demand equation, food
demand is rising as incomes increase in emerging economies
including the fast-developing BRIC nations – Brazil, Russia, India
and China – especially in cities where people now can afford a diet
richer in calories and protein. In India, meat consumption has
grown 40 percent over the last five years. Demand is rising for
pork in Russia, beef in Indonesia and dairy products in Mexico.
Higher meat consumption creates greater demand for grains to
feed cows, pigs and chickens.
Further competition now exists between food and fuel.
U.S. legislation is fostering demand for ethanol, a renewable
gas that burns cleaner than petroleum gas and is domestically
9 SPRING 2008
Increased demand and insufficient supply are causing food prices
to rise and reshaping how we think about agricultural markets.
By David Hale
International Economist and President of Hale Advisers, LLC
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11 SPRING 2008
RIGHT: Actress Drew Barrymore
and World Food Program
Executive Director Josette
Sheeran tour the CME Group
agricultural trading floor at the
historic CBOT building.
FAR RIGHT: WFP’s Josette
Sheeran tours the Central Grain
Market in Addis Ababa, Ethiopia
– where transportation
obstacles can contribute
to food shortages.
produced from corn. Biofuels are expected to consume up to
30 percent of the U.S. corn crop by 2010, according to the
World Economic Forum’s Global Risks 2008: A Global Risk
Network Report.
Ironically, U.S. ethanol production still contributes only mar-
ginally to meeting domestic demand for transportation fuel, says
Dr. Peter Goldsmith, extension specialist, agribusiness manage-
ment, in the Department of Agriculture and Consumer Economics
at the University of Illinois at Urbana-Champaign.
“U.S. ethanol has no role in fuel pricing, while the reverse
holds that ethanol prices are tightly correlated to petroleum prices.
The corn-based ethanol market is still relatively small, so it only
minimally reduces our dependence on foreign oil,” Goldsmith says.
Government trade policies also have had an impact on food
prices. The trend is toward increasing export tariffs and decreasing
import tariffs on grain and oilseeds. For example, India has
increased its grain export tariffs while lowering import tariffs on
edible oils. China has announced a further increase in edible oil
imports with projections currently up an additional 14 percent.
The result of keeping domestic production off the global market
while lowering barriers for the acquisition of grain and other com-
modities from the global market has been increased demand for
U.S. grain and oilseed products.
Also worth noting is the recent attention focused on index
funds. According to Commodity Futures Trading Commission
(CFTC) data, there is no evidence that these funds are the cause
of the bull market in grains. Data published by the CFTC indicate
the percentage of open interest held by index funds has remained
relatively constant since 2006, when this data was first published.
This means that, while index fund positions are growing, positions
by commercial and non-commercial participants have been grow-
ing at about the same rate. It should also be noted that wheat
futures, which hit a record $13 in March, closed below $7 in the
beginning of June. Speculators, including index funds, remained
in grain markets throughout the price drop.
All market participants play important roles. The speculator’s
role is to provide liquidity. Speculators often take on the other side
of the trade when a buyer or seller is needed. They are taking on
the risk someone else wants to lay off. It is also important to note
that speculators participate on both sides of the market – holding
both long and short positions.
These issues are reflected in CME Group’s grain and oilseed mar-
kets, which provide a venue for price discovery and a means to
manage price risk. As a result of market volatility, increased access
to the markets and expanded trading hours, volume in corn and
soybeans is up 23 and 29 percent, respectively, and wheat volume
is up nine percent.
CME Group has responded to rising volatility and prices
in these markets by increasing price limits for its grain and
oilseed contracts. This move was made to allow market partici-
pants to continue to utilize the contracts for price discovery
and risk mitigation at levels more aligned with today’s market.
CME Group also has submitted a petition to the CFTC for
approval to clear over-the-counter (OTC) calendar swaps
for corn, wheat and soybeans and basis swaps for corn. These
OTC swaps would enhance risk management practices, improve
transparency in the OTC grains swap market, and reduce
counterparty credit risk.



Beyond Feeding the Poor
On March 3, actress Drew Barrymore visited the CME Group trading floor at
141 W. Jackson, with Josette Sheeran, executive director of the United Nations’
World Food Program (WFP). The two were in Chicago for the Oprah Winfrey
Show – where Barrymore announced a $1 million personal donation to the
WFP for feeding Kenyan schoolchildren. But they also made a point to visit
CME Group for insight into the global food markets.
“I think the traders have a feel for where things are going,” Sheeran says.
“It’s important for the World Food Program to get a better sense of whether
we are going to see a sustained high level of food prices, to help us help those
who are simply being priced out of the food market.”
Although WFP’s primary mission is to feed those in need, the organization
also focuses on improving nutrition and quality of life, building assets and pro-
moting the self-reliance of poor people and communities. For more informa-
tion on this organization, please visit www.wfp.org.
Does the Road
to Global
Lie Ahead
In this magazine a year ago, I wrote that a compla-
cent consensus held by the central banking, politi-
cal, media and financial market worlds was totally
wrong. I wrote that credit conditions that formed
the “fundamentals” of the U.S. economy were likely
to deteriorate dramatically, with profound effects
both on the U.S. financial system and the worldwide
real economy.
The U.S. and world economy had been massive-
ly distorted by then-Federal Reserve Chairman Alan
Greenspan’s mistaken reaction to the technological
innovation and entrepreneurial dynamism trans-
forming the U.S. economy in the mid-1990s.
Greenspan rightly praised this free-market capital-
ism but totally misread the appropriate monetary
policy response. A year ago, I warned that Greenspan
unwittingly might have delivered free-market capi-
talism into the hands of its enemies. Sadly, that pre-
diction was horribly accurate.
Has the financial crisis opened the door to
world government?
Now, we should have grave fears about the future
organization of the global financial system and the
global economy. It is clear that the U.S. authorities
are prepared to do whatever it takes to fend off the
risk of depression. Unfortunately, “whatever it
takes” will be very unwelcome to all of us who rec-
ognize the moral and practical superiority of a free-
market capitalist system. Those who do not admit
that superiority are undoubtedly gleeful about the
present mess. They see it as an opportunity to
increase government control.
The global Financial Stability Forum, though a
worthy body in itself, is seeking to issue instructions
to the U.S. Securities and Exchange Commission
In the spring 2007 issue of CME Group Magazine, Bernard Connolly
predicted the collapse of the global market boom. He was right. Here’s why
– along with his views on the implications of today’s global financial crisis.
The U.S. economy is still
structurally excellent, but
simply cannot operate except
with real long interest rates
significantly below “normal.”
By Bernard Connolly
Global Strategist, Banque AIG
and, ultimately, to Congress. British Prime Minister
Gordon Brown is talking about a vision of “a global
covenant. . . to build the truly global society.” Brown
and some European Union allies may even view the
financial crisis as an opportunity to try to impose
elements of the bureaucratic E.U. model on the
United States.
In April, Greenspan wrote in the Financial
Times that, “[F]ree competitive markets are the
unrivalled way to organize economies. We have
tried regulation ranging from heavy to central plan-
ning. None meaningfully worked.” He is absolutely
right in that. But he ended, “Do we wish to retest
the evidence?” There are many who wish to do pre-
cisely that, with a worrying risk that they will get
their way. Why?
Has Greenspan killed free-market capitalism in the
United States?
I wrote a year ago that, “The tumor is inoperable,
but fatal if nothing is done. Chemotherapy can halt
the progression of the disease; but at the cost of
severe damage to the overall health of the organism
– the global free-market capitalist financial system.”
The tumor is a level of real long rates of interest far
below reasonable guesses of the economy’s potential
growth rate. Greenspan wrote in April that “the dra-
matic fall in real long-term interest rates” between
2001 and 2006 created housing bubbles and thus a
credit boom-bust in many countries. He is quite
right. But he will no doubt claim that the reason
long real rates fell was some alleged “global savings
glut” and that Fed [Federal Reserve] policy had
nothing to do with it.
The reality is very different. In March 2000,
the Treasury inflation-protected securities (TIPS)
curve was virtually flat at about 4.4 percent. In June
2007, the 10-year TIPS yield reached 2.83 percent.
In both episodes, the peaks in long rates were “nor-
mal” somewhat above the expected trend rate of
growth. But both were immediately followed by a
burst bubble – NASDAQ in spring 2000, credit in
summer 2007. In both episodes, long rates subse-
quently plunged – not because of a “global savings
glut” but because markets became pessimistic about
the U.S. economy’s growth prospects.
The U.S. economy is still structurally excellent
but simply cannot operate except with real long
interest rates significantly below “normal.” That
conclusion is deeply disturbing – indeed, tragic. It
implies that free-market capitalism no longer can
work properly in the United States. The real long
rate of interest is the single most important regula-
tor of a capitalist economy. If it once goes seriously
“wrong,” getting it “right” again will be extremely
painful and dangerous. The 1930s showed that,
bringing a retreat from free markets even in the
United States.
The Fed implicitly shares the judgment that the
risks involved in trying to put real long rates “right”
are just too horrible. But avoiding them requires real
long rates to stay aberrantly low indefinitely, bring-
ing misallocated capital, lower productivity growth,
and depressed confidence about the future. Asset
prices would have to go back to substantially over-
valued levels to sustain U.S. domestic demand in
line even with reduced potential growth rates.
Without a new credit bubble, that will require real
interest rates to move ever lower on a secular basis.
The alternative is to allow U.S. real rates to nor-
malize, but to offset the U.S. growth impact by
encouraging further massive dollar depreciation.
That is probably neither financially nor politically
feasible, either for the United States or the rest of
the world.
In short, the United States is, at best, likely to
become an economy with inefficiently allocated
capital, distorted risk-reward incentives, a low rate
of productivity growth, inflated asset prices and
ever-increasing financial vulnerability, all as part of
a Ponzi game. Income-distribution questions will
become more and more politically pointed. Even
worse, this unsatisfactory outcome can be achieved
only if the financial system is bailed out, possibly by
taxpayers. In such circumstances, it is almost
inevitable that financial regulation will become
more intrusive, onerous and harmful to economic
efficiency and economic freedom.
Euro-barbarians at the gate – but don’t
blame markets
If there had not been a credit bubble, even lower real
rates would have been needed. Those lower rates
would have produced a credit bubble. Ponzi games
and bubbles are symptoms of an underlying problem
– distorted intertemporal price signals – for which
central banks, not the private financial markets, are
squarely to blame. It is pointless to worry about
“price discovery” in financial or property markets
unless the central banks are prepared to eliminate
the underlying distortion. To do that, central banks
would have to try to engineer a very sharp rise in
real long rates – particularly in U.S. real long rates.
That would be the most irresponsible action of all at
this time.
Policy needs to find a middle way. At one extreme
are the fundamentalists who abhor any government
intervention, however dangerous the liquidation that
could result. At the other extreme are those who want
a more statist financial and economic system. The U.S.
authorities should certainly take no notice of advice
from Europe. Any unavoidable government interven-
tion should be done by people who hate doing it, not
by people who do it gleefully.
What we most admire in Greenspan is his devo-
tion to free-market capitalism. He would be well-quali-
fied to advise on the least harmful form of intervention.
However, he now seems to have reverted to the funda-
mentalist camp. That is ironic, given his disastrous, anti-
“Austrian” reluctance in the mid-1990s to prevent asset-
price booms, which are clear indications of distorted
intertemporal price signals. Did Greenspan’s failure to
act come from his close association with the prepos-
The United States is, at best, likely to become an economy
with inefficiently allocated capital, distorted risk-reward
incentives, a low rate of productivity growth, inflated
asset prices and ever-increasing financial vulnerability.
terous novelist and philosopher Ayn Rand, who held
the great Austrian-British economist Friedrich von
Hayek in contempt for being insufficiently individual-
ist and too open to an altruistic ethic that supposedly
opened the door to collectivism?
Hayek identified and warned against the road
to serfdom in the world. One has to hope that the
journey will not turn out to have been routed from
Rand via Greenspan.
“Solutions should t the risk.”
Managing Director,
Head of FX Prime Finance
and eCommerce, Citi

In the face of global exchange rate fluctuations, traders demand risk management
solutions that fit. That’s why Andrew Coyne relies on CME Group, the largest regulated
foreign exchange (FX) marketplace in the world. CME Group offers unparalleled liquidity,
with tight bid-offer spreads, in all major currencies — including the euro, British pound,
Swiss franc and Japanese yen. By trading on the CME Globex electronic platform, leading
corporate and investment banks like Citi utilize cutting-edge technology to provide
customers with credit-efficient, cost-effective ways to manage FX exposure.
By improving the way markets work, CME Group is a vital force in the global economy,
offering futures and options products on interest rates, equity indexes, foreign exchange,
commodities and alternative investments. Learn how CME Group can change your world
by visiting www.cmegroup.com/info.
The Globe logo, CME
, Chicago Mercantile Exchange
, CME Globex
CME Group

are trademarks of Chicago Mercantile Exchange Inc. CBOT
Chicago Board of Trade
are trademarks of the Board of Trade of the City of
Chicago. Copyright © 2008 CME Group. All rights reserved.
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Grain contracts traded at the Minneapolis
Grain Exchange, Kansas City Board of Trade
and Chicago Board of Trade have come together
on CME Globex – creating new opportunities
and efficiencies for market participants.
When the Chicago Board of Trade (CBOT) merged with the Chicago
Mercantile Exchange (CME) in 2007, one of the most obvious benefits was
the efficiencies to be gained by consolidating trading operations. While legacy
CME floor-traded contracts moved to the trading floor at the CBOT building,
legacy CBOT electronic contracts moved in the other direction, migrating
from the e-cbot platform to the CME Globex electronic trading platform.
With them moved wheat contracts from the Kansas City Board of Trade
(KCBT) and Minneapolis Grain Exchange (MGEX). As a result of thorough
preparation for the shift to CME Globex, officials at all three exchanges agree
that the migration was seamless and hardly noticeable to customers when it
occurred in January 2008.
“Having all three exchanges on the same platform provides the efficien-
cies of one-stop shopping for U.S. grain risk management needs,” says Jeff
Borchardt, KCBT president and chief executive officer. “For those trading
companies or intermediaries that deal in grain, it requires access to fewer plat-
forms to conduct business, thereby reducing costs. It also gives the three
exchanges the ability to offer trading strategies between products more effi-
ciently, intra-platform rather than inter-platform.”
Although all three exchanges trade wheat on CME Globex, each exchange
trades a different class of wheat with different uses.
“CME Group trades a soft red winter wheat (milled mainly for flour used
in crackers, biscuits and cookies), KCBT a hard red winter wheat (a higher
protein wheat milled into flour used for breads), and MGEX a hard red spring
wheat (a higher protein class milled into flour used in breads, bagels and hard-
baked goods),” explains Richard Jelinek, associate director, commodities, CME
Group. CME Group’s wheat class has the lowest physical production – but the
highest volume of all wheat markets in the world – due to its liquidity and
transparency. Having all three exchanges’ products on the same platform
allows for easier electronic spreading.
When it comes to trading platforms, putting multiple markets together on
one platform is an excellent idea, especially when that platform is CME
Globex, which has won renown around the world for its speed, reliability and
scalability since it was launched in 1992.
“Electronic availability is the key for all of today’s markets, not just wheat,
and consolidating products on a single platform creates efficiencies,” adds
Susan Sutherland, associate director, commodities, at CME Group.
For CME Group, the shift to one platform means the exchange can con-
centrate on further developing and enhancing CME Globex. Jelinek points out
that this ongoing process has improved the average round-trip response time
across all product complexes from 31 milliseconds to 13.7 milliseconds in the
first quarter of 2008.
Electronic trading in grain and soybean futures has grown dramatically
since side-by-side trading began on Aug. 1, 2006, and now accounts for more
than 80 percent of total volume in some of the major CME Group futures
contracts. The focus has now turned to options. The platform’s sophisticated
technology, rich functionality and strong distribution provide perfect growing
conditions for those contracts. Side-by-side trading for grain and oilseed options
during regular daytime trading hours began on April 14. As side-by-side futures
trading has produced a marked increase in total volume, attracted new market
“Electronic availability is the key for all of today’s
markets, not just wheat, and consolidating
products on a single platform creates efficiencies.”
0 2 4 6 8 9
311,727 489,802
363,663 267,504
1 3 5 7
Open outcry
participants and hiked the electronic share of trading, CME Group anticipates
similar results from side-by-side trading of grain and oilseed options.
“We are excited to have our products listed on the CME Globex platform,”
says James Facente, director, market operations, clearing and information tech-
nology at MGEX, describing CME Group as innovative market leaders and
CME Globex as the “premier” trading platform in the world. “We now have
exposure to new participants and new markets when you look at the platform’s
connectivity to overseas areas. We have always had overseas customers, but the
ease of access to one platform that is as reliable and easy to use as CME Globex
gives us a much greater audience.”
With the growing role of Brazil, Russia, India and China, as well as other
developing nations in global markets, those connections will become increas-
ingly important. CME Globex already has a world network distribution of
1,100 direct connections in more than 80 countries.
“Having all three U.S. grain exchanges on one platform offering electronic
trading day and night allows worldwide access to all of these global benchmark
products in the most efficient and cost-effective manner,” Borchardt says. “At
KCBT, we have certainly noticed an increase in global commercial participa-
tion in our contracts as a result.”
First-quarter 2008 trading volume already shows the effect of having all
the grain futures contracts available on CME Globex for most of the quarter.
Average daily volume of grain and oilseed futures jumped 27 percent for the
first quarter of 2008 from the same period a year earlier. As the chart illus-
trates, electronic futures trading growth was even more impressive. CME
Globex accounted for 61 percent of wheat futures volume for the first quarter
of 2008 versus 42 percent for the year-earlier period.
MGEX and KCBT also felt the positive effects of the migration to CME
Globex. At MGEX, wheat futures volume rose 24.5 percent for the first quarter
of 2008 compared with the same period a year ago, and the percentage traded
electronically doubled to 41.3 percent in 2008 from 20.8 percent in 2007.
Total wheat futures volume at KCBT climbed 16.7 percent in the first quarter
of 2008 compared with the prior year.
For the futures commission merchants and brokerage firms, having all
contracts on CME Globex also means more efficient operations on the other
end of the connectivity pipe, because the firms need to maintain only one con-
nection to a trading platform instead of accommodating multiple configura-
tions of different platforms.
And for customers, having everything they trade on CME Globex provides
a number of benefits: shorter execution trading times, reduced trade costs and
more choices in trading products and venues.
“The broad distribution that CME Globex offers makes it easier for our
global customers, both hedgers and traders alike, to participate in CME
Group’s grain and oilseed complex,” Jelinek says.
At the same time, those who have been trading agricultural products have
improved access to the other product complexes available on the same CME
Globex platform
When it comes to futures and options trading and CME Globex, there is
power in one.
Growth of Grain and Oilseed Futures
Contracts in thousands
“Having all three U.S. grain exchanges on
one platform offering electronic trading day
and night allows worldwide access to all
of these global benchmark products in the
most efficient and cost-effective manner.”
I$ Your Dough Ri$ing?
For over 150 years, the Kansas City Board of Trade has been the world’s market for
the trading of hard red winter wheat, the predominant bread wheat variety. KCBT
wheat futures and options offer choice of access — electronic or open outcry, so
you can reach us whenever and from wherever. Integrity, liquidity, transparency
and attention to customer service are our cornerstones of market trust and the
reason for our continued growth as the global benchmark for “bread wheat”.
For more information,
call 1-800-821-5228 or visit www.kcbt.com
The World’s “Bread Wheat” Market
21 SPRING 2008
In 1981, Michael Bloomberg started a company with three
co-workers and a revolutionary idea: proprietary terminals
offering real-time market data and analytical technology
to businesses and traders. More than 25 years later,
Bloomberg L.P. has become one of the largest financial
information and news organizations in the world – and
its wide-ranging impact on the financial markets led the
CME Group Center for Innovation to name Bloomberg
its 2008 winner of the Fred Arditti Innovation Award.
Bloomberg L.P. came into being after the sudden
end of Bloomberg’s career as a partner at Salomon
Brothers. He was shown the door after 15 years at
the firm, as one of 63 top-level Salomon execu-
tives to lose their jobs when Salomon merged with
Phibro Corporation, a publicly held commodities
trading firm.
The good news was he was given a $10 mil-
lion severance package. Bloomberg finished his
last day at Salomon on Sept. 30, 1981, the way he
began his first, working a 12-hour day. The next
day, he went to work at his own company.
Today, Bloomberg L.P. has more than 10,000
employees at 130 state-of-the-art offices all over the
world. But back then, as Bloomberg tells it, it was
“four guys, one room and a coffee pot” in a small
office in Manhattan with a view of an alley.
Bloomberg was the first employee, but he started
the firm with three other colleagues from Salomon.
“The real fun was back at the beginning,” he
says. “I’ll never forget how hard we worked for
three years to get our first order.”
That order would be the best transaction
Bloomberg ever made. Merrill Lynch ordered
20 terminals at a cost of $1,000 per terminal.
“I remember writing 20 x $1,000 on the back
of an envelope thinking, ‘That would cover our
overhead,’” Bloomberg says. “Today, that wouldn’t
cover our food bill.”
The deal with Merrill Lynch was actually
more complicated, more speculative and, well,
luckier than that, as detailed in his book
Bloomberg by Bloomberg. In the sales meeting with
Merrill, Bloomberg explained that his firm’s tech-
nology would provide data unique in the capital
markets – a system that would provide yield curve
analysis, updated throughout the day as the mar-
kets moved, including futures versus cash. The
technology would then note every transaction and
mark positions to market instantly. Bloomberg
said that he could deliver the system within six
months – faster than Merrill would be able to do
if the company developed it internally.
In June 1983, Bloomberg delivered the sys-
tem to Merrill on time. They ran one function on
the computer and it crashed, but no one seemed
to mind. The pieces were in place and Bloomberg
was on his way.
As it turned out, this was virtually the only
break Bloomberg needed because Merrill Lynch
signed him to an exclusive deal that prevented him
from selling his terminals to competitors for five
years. Merrill Lynch later took a 30 percent stake
in the firm for $30 million and helped disseminate
Bloomberg terminals to its customers around the
globe. Both companies expanded rapidly, equipped
with technology that gave them an edge.
Today, the terminals have evolved into the
used by approximately 250,000 subscribers from
the world’s central banks, investment institutions,
commercial banks, government offices and agen-
cies, law firms, corporations and news organiza-
tions in more than 150 countries. Bloomberg
News encompasses television and radio programs
in seven languages, financial book publishing, an
award-winning magazine and print news carried
by more than 400 publications in 70 countries.
Bloomberg L.P. is known by the general public for
its media services rather than for its analytical
technology. But it was the technology that set
Bloomberg apart from every other data vendor
and newswire service. Bloomberg had the right
customer in Merrill. And it had the right product
at the right time when the bond markets blos-
somed in the 1980s.
As the winner of CME Group Center for Innovation’s Fred Arditti Innovation Award
in April, Michael Bloomberg was recognized for his entrepreneurial skills and ability
to bring truly groundbreaking change to the financial markets.
What is admirable about Michael Bloomberg is not just that he built his company,
Bloomberg L.P., into one of the top data and news companies in the world, but that he
did it with his own money, from scratch, and almost entirely internally and organically.
Bloomberg, now worth an estimated $11.5 billion according to Forbes Magazine,
reveals the secret to building a successful company or organization.
“Innovation is having the instinct that it might work,” Bloomberg says. “We want
people who try things that don’t work, but don’t quit. Don’t walk away from trying
the next thing.”
New York Mayor Michael Bloomberg received the
CME Group Fred Arditti Innovation Award for his
role in revolutionizing the analysis of financial data.
What made Bloomberg terminals so valu-
able is that they could provide bond pricing
information in a way no one else could.
Bloomberg terminals provided the relative value
of debt instruments based on their yield and
price histories, giving Merrill Lynch an accurate
picture of the bond market instantly. Such infor-
mation was valuable for anyone trading the
interest rate market.
Bloomberg advanced his company further in
May 1987, when he convinced The Wall Street
Journal and Associated Press that his company
should become the sole disseminator of daily U.S.
government bond prices, a role that had been
handled by the Federal Reserve Bank of New
York for more than a century. The Fed was liter-
ally hand-delivering critical bond data to newspa-
pers and wire services via a courier. Bloomberg
simply automated that delivery process, a move
that put the company on the map.
By 1990, Bloomberg decided it was time to
move into the news business. He began building
news desks to cover the financial markets
around the world. The company held its own
against newswire behemoths Dow Jones and
Reuters by proving to customers that its news
coverage was as good as or better than the com-
petition. The company broke into the television
and radio sectors in 1991 and is now considered
a major force in financial news.
Bloomberg News implemented new and bet-
ter ways to generate and send financial news to
customers. For example, Bloomberg computers
are programmed to periodically update market
information, rather than have reporters do so.
Automated market information about the Dow
Jones Industrial Average, S&P 500 Index or other
indexes is created and sent to customers in a matter
of milliseconds – and reads like a story. The screen
will display something like, “The Dow Jones
Industrial Average was 1.09 percent lower at 3:01
p.m. Eastern time, down 62.14 at 12202.” The story
includes the biggest gainers and losers in the index.
Interestingly, for an entrepreneur who pays
incredible attention to detail in all aspects of his
business – down to the salt-water fish tanks and
free snacks for employees at each office –
Bloomberg finds very little value in detailing
a long-term business plan.
“If you’re going to succeed, you need a vision,
one that’s affordable, practical and fills a customer
need,” he writes in his book. “Then go for it. Don’t
worry too much about the details. Don’t second-
guess your creativity. Avoid overanalyzing the new
project’s potential. Most importantly, don’t strate-
gize about the long-term too much.”
From left: Leo Melamed, CME Group chairman
emeritus; Michael Bloomberg, mayor of New York;
and Robert Merton, 1997 Nobel Laureate in economics
The CME Group Center for Innovation (CFI) was
founded in 2003 to create and sponsor thought-pro-
voking original programming that identifies, showcas-
es and fosters examples of significant innovation and
creative thinking across multiple industries.
The CME Group Fred Arditti Innovation Award,
sponsored by the center, honors an individual or group
whose innovative ideas, products or services have cre-
ated significant change to markets, commerce or
trade. The annual award honors innovation that has
had a positive impact on the economic well-being of
individuals, industries or nations. The award is named
after the exchange’s former chief economist
Fred Arditti, who was instrumental in developing the
International Monetary Market index upon which
CME Group’s Eurodollar futures contract, the world’s
most actively traded futures contract, was founded.
Michael Bloomberg, founder of Bloomberg L.P.
and current mayor of New York City, was the recipient
of the 2008 award in April. He was recognized for the
tremendous innovations in financial markets that he
fostered through the founding of his company, today
one of the largest financial information and news
organizations in the world.
Prior recipients of the award include: William
Sharpe, Nobel Prize-winner in economics; Eugene
Fama, Distinguished Service Professor of Finance
at the University of Chicago Graduate School of
Business; and Leo Melamed, CME Group chair-
man emeritus.
CFI’s advisory council is responsible for selecting
each year’s recipient. John P. Gould, Steven
G. Rothmeier Distinguished Service Professor of
Economics, University of Chicago Graduate School of
Business, serves as the council’s chairman. Other
noted committee members include Gary S. Becker
and Robert Merton, Nobel Prize-winning economists;
David D. Hale, international economist; Michael
H. Moskow, former president, Federal Reserve Bank
of Chicago; and Robert J. Shiller, Stanley B. Resor
Professor of Economics, Yale University and chief
economist, Macro Securities Research, LLC.
Bloomberg entered public service when he was
elected mayor of New York City in 2001. He was
re-elected in 2005 and plans to step down in 2009
when his term ends. As mayor of New York City,
Bloomberg has brought much of the same innova-
tive spirit to government.
The budget overseen by the mayor’s office is
the largest municipal budget in the United States
– roughly $63 billion a year. The city employs
more than 370,000 full-time and full-time equiv-
alent employees and spends about $20 billion to
educate almost 1.1 million children. Bloomberg
says innovation is needed in the public sphere
and jokes that running a government budget is
the exact opposite of running a corporate one.
“Business is a dog-eat-dog world,” Bloomberg
says. “Government is actually just the reverse.”
In business, executives typically move more
resources into the profitable lines of the company
and cut away resources from failing product lines.
In government, however, profitable areas often
are used to bolster unprofitable and underper-
forming areas.
Yet even there, Bloomberg has tried to bring
efficiency and innovation to government by trying
to measure the effectiveness of programs and hold
various sectors accountable.
“You have to be able to collect and trust the
data,” Bloomberg says. “If you can’t measure it,
you can’t manage it.”
Bloomberg says he doesn’t know what his
next step will be after he steps down as mayor
after his second term. He’s often been rumored to
be a strong candidate for a federal post, although
he ruled out a run for president. But if he follows
his personal credo that transformation is good,
Bloomberg will likely be leading change.
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27 SPRING 2008
Futures exchanges around the world have operated their own clearing houses for decades,
but this longstanding business model is facing a new debate in the United States and Europe.
When it comes to clearing, futures and equity
exchanges have taken separate paths. One clear-
ing model isn’t superior to another because each
is designed for the unique business needs of the
markets it serves.
For more than 100 years, the futures industry
has benefited from a central counterparty clear-
ing (CCP) model in which exchanges own their
own clearing houses. This “vertical” model has
allowed exchanges to invest confidently in devel-
oping innovative new products and services that
have helped markets grow. It also has encouraged
the development of risk management tools, such
as the Standard Portfolio Analysis of Risk (SPAN)
system, which has become the industry standard
for portfolio risk assessment and is now used by
more than 50 exchanges worldwide.
In contrast, the securities and options world,
where exchanges list stocks and options issued
by third-party corporations, uses a “horizontal”
or utility model, with one participant-owned
clearing house for all the exchanges’ products.
For stocks, it is the Depository Trust & Clearing
Corporation and for options, the Options
Clearing Corporation. This model works because
stocks are issued by a third party, whereas
futures are proprietary products, created by the
exchanges on which they trade.
As consolidation and globalization
reshape the industry, a tug of war has devel-
oped between established futures exchanges
and the large investment banks and hedge
funds that are some of their biggest users. For
example, several of the big banks plan to start
electronic exchanges to compete with CME
Group in the United States and Liffe in Europe.
One of the newest startups, Electronic Liquidity
Exchange (ELX), is backed by investment
banks, such as JPMorgan and Merrill Lynch,
and financial services firms, such as Citadel
Investment Group and Peak6. And in Europe,
brokers including Goldman Sachs and UBS are
in talks to start a rival exchange to Liffe, called
Project Rainbow.
These firms contend that the ownership of
clearing services that futures exchanges like
CME Group have makes it harder for new
exchanges to enter the market and build liquidi-
ty. Other market participants have added their
opinions to the conversation, suggesting that it
may be time to mandate a horizontal model
rather than continuing to let the market deter-
mine which model best meets its needs. The
Futures Industry Association (FIA), whose board
is weighted toward many of the large investment
banks, also favors instituting a horizontal clear-
ing model.
Proponents of vertical clearing counter
that this clearing model has been the industry
standard for decades, with astonishing success.
The CCP model has protected exchange-traded
markets against many of the issues around
transparency, liquidity, and valuations that peri-
odically crop up in over-the-counter (OTC)
markets. CME Clearing has operated without a
single default in the 100-plus years it has existed.
Basically, they say, “If it ain’t broke, don’t fix it.”
In a speech to the Managed Funds
Association earlier this year, CME Group Chief
Executive Officer Craig Donohue pointed out
that, “Despite [CME Group’s] significant growth,
we have improved market efficiencies, reducing
capital, margining and financing costs, as well as
exchange trading fees, by hundred of millions of
dollars over the last decade.”
Donohue also contended that central coun-
terparty clearing systems guarantee three
essential benefits to the customer: transparency
of valuation, because CCPs show daily mark-to-
market prices to all participants; independence;
To bridge the gap between over-the-counter
(OTC) markets and central counterparty
clearing, CME Clearing offers a series of
services called CME Clearing360, which
extends the benefits of exchange-traded
clearing to the OTC market in some “plain
vanilla” products, and also provides other
clearing services.
Through CME Clearing360, firms such
as hedge funds, proprietary trading firms
and global and regional banks have access to
the same performance guarantee that has
traditionally been available only with
exchange-traded products. CME Clearing360
provides these customers with greater capi-
tal and operational efficiencies, including
risk offsets against related futures and
options positions. It also delivers world-class
risk management of the credit, operational,
and legal risks related to OTC trading, as well
as regulated market protections.
CME Clearing360 includes transactions
executed on FXMarketSpace, cleared inter-
est rate swaps, block trades executed
through Pivot, ethanol calendar swaps and
substitutions. CME Group also serves OTC
market participants in the credit derivatives
markets through its subsidiary CMA.
Some of these initiatives are CME Group
“firsts”: FXMarketSpace, a joint venture
company of CME Group and Reuters, is the
first centrally-cleared, global FX platform for
the cash FX market. Later this year, CME
Clearing360 will offer clearing services for a
new product, CME Swaps on Swapstream,
which will be the first interest rate swap prod-
uct to offer all OTC market participants the
full benefit of central counterparty clearing.
Trader A
on Trade
Central Counterparty
Contains Default
Trader B
Buying from
Trader A
Trader B Customers
Trader A Customers
Trader A
on Trade
Trader B
Buying from
Trader A
Trader B Customers
Trader A Customers
With a central counterparty model, the clearing house is the buyer
to every seller and the seller to every buyer. So, if Trader A defaults,
the default is contained between Trader A and the clearing house,
protecting everyone in the green circles below.
The over-the-counter market’s bilateral model works differently.
If Trader A defaults, neither Trader A, Trader B, nor the others
they transact business with are protected from that default,
leaving everyone in the orange circles at risk.
Customers protected from losses
Customers at risk for losses
CME Clearing360
and neutrality, because they are not dominated
by a few large interested parties.
Over the years, exchange-owned clearing
houses have demonstrated their ability to
enhance transparency and reduce systemic
credit risk. By contrast, the intermediaries that
own a utility clearing house have the potential to
limit clearing services to selected products and
markets in the pursuit of proprietary trading
profits or prime brokerage revenue streams. In
turn, this may limit transparency and exacerbate
risk in the swap and credit markets.
Opponents of the vertical model contend
that, by making it harder for new exchanges to
compete, the current model discourages inno-
vation and perpetuates higher prices. But the
current vertical model is the one that truly
encourages innovation, say its proponents.
Exchanges that depend upon clearing as a prof-
it center have an incentive to improve their
products and innovate in the clearing arena.
“The clearing house structure in the indus-
try has been very innovative over the last 25
years,” says Tom Kloet, former senior executive
vice president and chief operating officer of
NewEdge Financial, a clearing member of CME
Group. “Regulators should ask the question,
‘Would a single, horizontal model bring develop-
ments like SPAN?’”
He acknowledges that it would be difficult
for newcomer exchanges to duplicate CME
Group’s operational excellence and product inno-
vation. “A‘me too’ effort won’t create a competi-
tive model,” he says. “But there is room to create
something better.”
The issue of global competition
Competition in futures is now global, and the
global trend is toward increased vertical clearing,
Donohue pointed out. Some 70 percent of all
futures and options contracts traded globally are
cleared through exchange-owned or controlled
clearing facilities. However, looking at derivatives
volumes worldwide, only about 17 percent of
derivatives trading is transacted on an exchange,
a percentage dwarfed by the 83 percent of trad-
ing done in the OTC derivatives market.
In Europe, Liffe is renegotiating its contract
with LCH.Clearnet in order to manage its own
clearing house and compete on a more level play-
ing field with CME Group and Eurex. In a letter to
the Financial Times, Liffe’s Chief Executive Hugh
Freedberg said, “The vast majority of derivatives
exchanges in the world also operate their own
clearing services… If Liffe is not able freely to
choose its clearing solution, it would not be able
to compete on a level playing field and would be
at a competitive disadvantage.”
At least two futures regulators share the
view that the current structure does not need
to be replaced. Walter Lukken, acting chair-
man of the Commodity Futures Trading
Commission (CFTC), said the CFTC is “confi-
dent that the U.S. futures exchanges and
clearing houses are functioning well, espe-
cially during these turbulent economic
times.” CFTC Commissioner Bart Chilton also
released a statement questioning the
Department of Justice’s (DOJ) judgment and
Q: What about the charge that CME Group has
become so powerful that it now inhibits new
exchanges from starting up?
A: Other exchanges are starting all the time, with
no dearth of clearing services providers to
choose from. The IntercontinentalExchange
(ICE) is a very good example of a successful new
entrant. ICE used an available clearing provider
for a while and then decided to support its own
product innovations with its own market model.
They’ve already done it in the United States and
are now seeking an exchange-owned clearing
model in Europe. Another new exchange, ELX,
hasn’t announced a clearer yet, but they have a
number of choices. There is no compelling evi-
dence that clearing makes or breaks success in
entering a market. What is important in attract-
ing people to use a less liquid market is that you
need to offer them some added benefit. People
who have added electronic access to a histori-
cally non-electronic market have been success-
ful in competing against established liquidity.
Q: Which clearing model is more consistent
with the Commodity Futures Modernization
Act of 2000?
A: The CFTC is pretty clear in the way it oper-
ates – it is open to competition in the markets it
regulates. The U.S. futures industry is probably
the easiest market to enter with either a new
exchange vehicle or a new clearing vehicle. Any
clearing structure can be efficient and provide
appropriate risk management. But each clearing
structure is optimized for a slightly different mix
of participants.
Q: What are the potential dangers of a regulator
imposing a clearing model on the industry?
A: A regulator-mandated structure could poten-
tially create a system that is less responsive to
changes in market conditions. Depending on its
ownership, a utility model’s only goal may be to
keep transaction costs down. Transaction costs
consist of the fees and the spread. So, if an
exchange charges “lower” fees, but lacks liquidi-
ty so spreads are wide, the end users’ overall
transaction costs will actually go up.
We believe in a market-driven solution,
which allows more than one type of clearing
model, as opposed to a solution mandated
by regulators.
Q: Which solution really benefits the end user
of the markets: the “vertical” exchange-owned
central counterparty clearing model (i.e., CME
Clearing) or the “horizontal” utility model?
A: Avertical model gives end users access to a
pool of liquidity where they can trade at the
best price. But it also provides them with
access to innovation in products.
In the horizontal model, the clearing mem-
bers own the clearing house. That model is
aligned to benefit just that group, rather than
all end users. In contrast, CME Group – and
CME Clearing – is publicly owned by a wide
variety of different investors. Vertical models
focus on several areas: supporting innovation,
bringing new products to market quickly, deliv-
ering cost efficiencies through low clearing
fees and/or rebates for intermediaries, and
enhancing operational efficiencies that allow
clearing members to connect with the lowest
cost. In contrast, horizontal models focus
solely on the last two.
Some people define competition very nar-
rowly as the ability of different trading vehicles
offering the same products to compete solely
on the fees they charge. We define competition
much more broadly: there is competition
among different service models and among
clearing houses for the right to provide services
to various markets. This type of competition
benefits the end users of the market, rather
than only benefiting the clearing members.
timing of its February 2008 letter to the U.S.
Treasury, calling for a change in clearing
structure. “The business model that the DOJ
staff is now condemning received, only a few
short months ago, the legal blessing of DOJ
following its extensive, comprehensive, and
exhaustive review of the CME/CBOT merger.”
The CFTC considers itself “market-neutral”
regarding clearing structure.
31 SPRING 2008
The integration of the Chicago Mercantile
Exchange (CME) and Chicago Board of Trade
(CBOT) trading floors to a single location at 141
W. Jackson Blvd. was the natural outcome of
the exchanges’ historic merger in mid-2007,
which promised greater efficiencies to the
exchanges and market participants alike. It also
marks the first time that traders can see (and
hear) trading on the entire yield curve, as well
as on all the major equity index contracts.
“Bringing together all the open outcry
markets under one roof has created new cross-
product trading opportunities and enabled the
trading firms to be more flexible and efficient in
assigning personnel and resources,” says Bryan
Durkin, managing director and chief operating
officer of CME Group. “We also believe our
exchange can better address the needs of
market participants by focusing resources on
a single location.”
Bringing all the floor traders under one roof
required a level of planning worthy of a military
operation. Detailed discussions began as soon
as the CME-CBOT merger was completed in
July 2007. CME Group developed a list of the
areas that would be consolidated and
designated a team of lead managers from both
CBOT and CME to manage the policy,
procedure and physical changes in each area.
Asubcommittee of board members – Chris
Stewart, Howard Siegel, Bill Salatich, Gary
Katler, Marty Gepsman and Bob Corvino –
acted as a conduit for communication between
the floor population, management and the
board. This strong emphasis on ongoing dialog
enabled management and the board to be
more sensitive to end users’ needs and
concerns about change.
Developing a methodical plan and
disciplined timelines for each area required
more time up front, but saved time as the
transition gathered steam. The teams
developed a process to identify and solve
potential roadblocks, resulting in many
issues being solved almost as soon as they
were identified.
The scope of the project was vast, and built
upon the technology integration simultaneously
under way. The trading floor needed to
accommodate 45 different class Afirms and
2,500 additional traders, clerks, brokers and
others moving over from the CME location half
a mile away at 20 S. Wacker Drive. Physical
changes ranged from subtle to substantial.
Almost all the CBOT financial trading pits had
to be moved to a greater or lesser degree to
make room for the CME-traded products.
Booths were built or reassigned. Acompletely
new wallboard system was mounted.
Thousands of new phone and data lines were
installed so that CME phone numbers could be
transferred to the CBOT location between one
trading day and the next. No detail was too
small to note – for example, traders trying out
their new pit for the first time pulled out the
tape measure to verify that one step was two
inches shallower than in the old pit.
As part of the project, CME Group teams
also helped evaluate technologies being used
on the CME and CBOT trading floors. The goal
was to identify the most user-friendly, robust
and scalable platforms for use on the
consolidated trading floor. Once decisions
were made on which technologies to adopt,
the trading floor operations staff trained floor
personnel on technology that was new to
them. For example, CME traders learned the
CBOT electronic order routing system and
CBOT traders were trained on CME
handhelds. From January through early
March, about 100 employees also were
trained on a new price reporting system.
The actual move took place over three
weekends. The CME equity complex relocated
over the first weekend in April and began full
operation at the CBOT’s historic art deco
building on Monday, April 7. The foreign
exchange (FX) and interest rate complexes
moved over the last weekend in April and
began operation in their new home on
Monday, April 28. Finally, the commodity
complex made its transition over the third
weekend in May, starting to trade at 141 W.
Jackson on Monday, May 19.
“We held a series of mock trading sessions
that were designed to identify potential issues
prior to live trading on Day one,” says Julie
Holzrichter, managing director of operations
for CME Group. “Our expectations and
planning were validated through the process
as we received positive feedback from our
customers. That’s a testimony to the hard work
of hundreds of people – especially the
operations staff, project managers, technology
team members and construction crews.”
In conjunction with the trading floor
consolidation, the CME Globex Learning Center
will move this summer from 20 S. Wacker to 141
W. Jackson. The newly renamed Trading
Knowledge Center will be located on the
mezzanine level of the Van Buren Street
entrance. The 1,500-square-foot center will
enable market participants to learn the basics
of electronic trading in a simulated
environment using CME Group workstations,
trading and charting software from various
independent software vendors (ISVs), and real-
time news and data feeds. The center also will
provide access to industry periodicals, books,
journals and various seminars.
More than 3.3 million contracts per day traded
via open outcry in the first quarter of 2008,
making the consolidated CME Group trading
floor a very busy place. “There’s a different
‘vibe’ when everyone is on the same floor,”
Holzrichter notes.
S&P futures and options are now
positioned in the northwest section of the
integrated trading floor, adjacent to the Dow
futures and options. FXfutures and options are
to the northeast, with Eurodollar contracts to
the southeast. The agricultural complex is
accommodated in the southwest quadrant and
an adjacent room. Nearly 1,500 booths ring the
trading floor. Media cameras will continue to
capture the activity and roar of the floor from a
platform overlooking the S&P pits and on the
opposite side of the floor overlooking the
Eurodollar futures pit.
“Coming together on one trading floor is a
hugely historical moment for our institutions,”
says Durkin. “But it also shows how dynamic
and resilient our markets are. We integrated the
CME Group trading floor in a way that was
largely transparent to end users, thanks to a lot
of forethought, confidence, and ability to
manage dozens of operational and technical
issues. I’m very pleased and proud of everyone
who made it happen, from our members to our
market reporters.”
“We’ve been so busy with the hubbub of
the integration that I think it will take the next
year for us to truly realize its significance –
maybe, when we see cross-trading evolve so
that Dow traders routinely spread against the
S&P contracts and Eurodollar traders add
Treasury contracts. There is a lot of
opportunity here.”
Not your grandfather’s
exchange anymore...
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on CME Globex®
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35 SPRING 2008
long as it is measured in three-month increments.
Similarly, a euro swap can be between six months and
30 years, so long as maturity is measured in six-month
The cash flows for U.S. dollar CME Cleared
Swaps are quarterly and fall on the International
Monetary Market (IMM) Wednesday of every third
month following the forward start date of the swap.
For euro swaps, cash flows are twice a year and fall
on the IMM Wednesday of every sixth month fol-
lowing the forward start date of the swap. The swap
size can be any size the two counterparties agree
on, so long as the notional amount is a multiple of
100,000 currency units, whether dollars or euros.
The key differentiator between vanilla interest
rate swaps and the new swap product, and what gen-
erates major benefits to both counterparties, is the
presence of CME Clearing in the transaction. Once
the two parties reach agreement on the terms of the
swap, the clearing house becomes – as it does with
futures and options on futures – the buyer to every
seller and seller to every buyer, virtually eliminating
counterparty risk. In today’s market, concerns about
counterparty risk have never been greater and are
not limited to any one asset class.
“The recent credit crisis has emphasized how
important it is to control our exposure and manage
collateral and counterparty risk,” says Diego Magia,
principal of the Elcano RV Fund. “CME Swaps on
Swapstream will help us benefit from all the efficien-
cies of a clearing house without sacrificing the way
we conduct our OTC business.”
In addition to mitigating counterparty risk, the
presence of CME Clearing in the equation eliminates
the need for ISDA master agreements or any of the
other cumbersome OTC transaction documentation.
Until now, ISDA documentation has presented a
hurdle to many market participants.
John M. Huber, chief investment officer of
Voyageur Asset Management, says, “The costly and
laborious process of getting ISDA agreements for
our customers… has kept us from trading swaps in
the past. CME Swaps on Swapstream removes
What happens when you combine the benefits of
a centrally cleared product with attributes of an
over-the-counter (OTC) product? The interest rate
world is about to find out when, later this year,
CME Swaps on Swapstream (CME Cleared Swaps)
will begin trading, offering the OTC interest rate
market the first-ever, centrally cleared interest rate
swap available to all market participants. CME
Cleared Swaps will offer the efficiencies and finan-
cial safeguards of a futures contract, while main-
taining much of the flexibility of an interest rate
swap. The product will be centrally cleared using
CME Group’s OTC clearing solution, CME
Clearing360. Trades can be submitted for clearing
either through Swapsteam’s sPro platform or using
CME Group’s web-based Front-End Clearing system.
The OTC interest rate swap market is a signifi-
cant market internationally. According to the
International Swaps and Derivatives Association
(ISDA), the notional principal outstanding for all
interest rate swaps was $382 trillion by the end of
2007, after converting swaps from all currencies into
dollar equivalents. Of this total, U.S. dollar and euro-
denominated “plain vanilla” swaps comprise the
lion’s share of the market.
Conventional interest rate swaps involve the
exchange of cash flows – one based on a floating
interest rate, the other based on a fixed interest rate
– indexed to a notional principal amount. These
exchanges usually occur at three-month or six-
month intervals. Typically, the floating rates are
three-month or six-month London Interbank
Offered Rate (LIBOR), and fixed rate is the rate at
which the market value of the two cash flows are
equal at the time the agreement is entered into.
CME Cleared Swaps are true interest rate
swaps, not a futures contract on an interest rate
swap. While they standardize certain terms of the
agreement, they maintain flexibility and trading
structure comparable to vanilla interest rate swaps.
Maturities follow OTC market protocols. The
maturity of U.S. dollar-denominated CME Cleared
Swaps can be between three months and 30 years, so
CME Cleared Swaps will offer the efficiencies and financial
safeguards of a futures contract while maintaining much of the
flexibility of an interest rate swap.
these obstacles.”
Positions are marked to market daily, providing
an additional level of financial safeguards and offset-
ting positions are automatically netted. In comparison,
OTC positions are not netted, which creates balance
sheet inefficiencies.
Eventually, CME Cleared Swaps will trade
electronically on Swapstream’s sPro platform.
Transactions will then benefit from the sPro platform’s
straight-through processing. Swapstream Chief
Executive Officer Stephane Rio believes that the
straight-through process from order to clearing will
attract interest rate swap traders to the product.
“Straight-through processing means that when a
user clicks to accept the deal, the system automati-
cally transmits it to clearing,” Rio says. “With no
ticket to write, no trade entry to make, and no order
confirmation to send, the Swapstream system elimi-
nates these potential sources of error.”
The fact that 33 buy-side firms in the United
States and Europe are participating in an early adopter
program for these swaps provides an obvious measure
of the value market participants see in joining OTC
swaps with exchange-style clearing. The list of pro-
gram participants includes banks, mortgage lenders,
asset managers, hedge funds, and proprietary trading
firms. Among them are such well-known names as
Julius Baer Group, Capula Investment Management,
Citadel Investment Group, Commerzbank Group
Treasury and Henderson Global Investors.
Kai Franzmeyer, head of Commerzbank Group
Treasury, likes the price discovery aspect of elec-
tronic trading.
“Electronic trading with multiple market mak-
ers leads to tighter bid-ask spreads and greater price
efficiency,” Franzmeyer says. “Also, with the prices
right there on the screen, you will avoid having to call
all the dealers. For Group Treasury, with its many
swap positions denominated in billions, this is an
important gain in efficiency.”
To this, Swapstream’s Rio adds, “Asset man-
agers often need to be able to show proof of best
execution. Electronic trading proves it. It’s all there
on the screen.”
Underscoring the importance of being able to
access the swap market efficiently, Franzmeyer
adds, “Whether we want to hedge our own or other
bonds, swaps are the best hedge for what we do in
Europe. They are far more effective than, say, bund
futures. This ultimately will be a very efficient way
to do our swap business.”
CME Swaps on Swapstream will be welcomed by interest
rate market participants looking for a better way to trade.
NYSE Euronext will get more “precious” when it
completes the purchase of CME Group’s metals
complex later this year. Trading of full and E-mini
gold and silver futures and options on futures
contracts will begin trading on LIFFE CONNECT,
NYSE Euronext’s derivatives trading system,
pending regulatory approvals.
Launched by the Chicago Board of Trade
(CBOT) in 2001, precious metals derivatives
currently trade on e-cbot, an electronic trad-
ing platform that is managed by Atos
Euronext Market Solutions and powered by
Under terms of the agreement, NYSE
Euronext will acquire the CBOT metals complex
from CME Group, including its volume and open
interest. CBOT will continue to act as the
Designated Contract Market (DCM) for the
products until NYSE Euronext establishes its
own DCM. CME Group has agreed to provide
clearing services for up to one year, after which
NYSE Euronext will provide for an alternative
clearing solution.
NYSE Euronext to
Purchase Metals Complex
U.S. Secretary of Agriculture Ed Schafer visited CME Group on April 15. Schafer, who was appoint-
ed to the post in January 2008, toured the agricultural and financial trading floors before the 9:30
a.m. opening of the grains markets. He met with CME Group Executive Chairman Terry Duffy
(right) and (from left) Director Christopher Stewart and CME Group Managing Director Robert
Ray, to discuss today’s pressing topics, ranging from pending legislation to the Columbia Free
Trade Agreement and the agriculture markets.
U.S. Secretary of Agriculture Visits CME Group
Former CME Group Deputy Chief Information
Officer Kevin Kometer has been appointed man-
aging director and chief information officer of
CME Group, effective at the end of June.
Kometer succeeds James Krause, who will retire
following 23 years of service.
Kometer, 43, has been with the company 14
years. As managing director and deputy chief
information officer, Kometer had primary over-
sight for the development and quality manage-
ment of CME Group trading systems for futures
and options, both on the trading floor and on the
CME Globex electronic trading platform. He also
was responsible for leading the migration effort
of CBOTproducts traded on the e-cbot electron-
ic trading platform to CME Globex during the
CME/CBOT integration.
A New Source of Information
39 SPRING 2008
CME Group launched futures and options on
futures on the U.S. Bureau of Labor Statistics’
(BLS) nonfarm payroll data, at the end of April.
The new products allow customers to directly
manage their exposure to the government labor
number or to offset positions in financial markets.
Typically the first major economic release of
each month, the nonfarm payroll report is closely
followed as a way to gauge how the Federal Open
Markets Committee perceives economic growth.
Each contract is valued at $25 times the
change in the nonfarm payroll number from the
previous month. One contract will be listed on the
Monday after the previous month’s release.
Trading in the expiring contract concludes at 7:25
a.m. on the day that the BLS releases its nonfarm
payroll number from the previous month.
Because employment data is one of the
most widely watched set of economic indicators,
nonfarm payroll futures and options are the first
“economic event” products introduced by CME
Group. Economic event futures and options pro-
vide the complete price transparency and easy
accessibility that customers need.
Nonfarm Payroll
Futures Launch
traders, while – in line with the relatively low
number of algorithmic traders – reported fills
relative to benchmark prices concerned a
mere 23 percent of active traders and 15 per-
cent of real-money traders.
Top risks to the FX markets cited by sur-
vey respondents included the liquidity crunch
(40 percent) and macro-economic issues (31
A CME Group white paper takes a more
in-depth look at these trends and is available at
Survey Provides
Insight on FX Trends
Foreign exchange (FX) market participants’
growing focus on electronic trading, risk man-
agement and cost control is driving the record
growth in global FX markets, according to CME
Group’s Global FX Market Study, conducted by
independent research firm ClientKnowledge.
Study highlights included:
• Traders expect electronic trading growth to
gain momentum faster than previously antic-
ipated. They predicted that more than 80
percent of all cash business, on average, will
be executed electronically in 2010.
• About 72 percent of bank survey participants
cited counterparty risk as their biggest con-
cern, followed by settlement risk (64 percent).
• Traders also continue to focus on efficient exe-
cution, with 79 percent of active traders and 81
percent of real-money traders concerned pri-
marily with bid/offer spreads as the key com-
ponent of their transaction costs.
• Market impact concerned 59 percent of active
and 64 percent of less active traders.
• Settlement costs concerned 49 percent of
active traders and 48 percent of less active
Banks: 2007 80%
Settlement risk Counterparty Latency
Source: Global FX Market Survey sponsored by CME Group: research conducted by Client Knowledge.
%of respondents undertaking transaction cost analysis
CME Group is receiving external accolades for many elements of its
corporate brand campaign. So far this spring, the company has won
the following awards:
The Association of Marketing and Communications Professionals
in April awarded its highest honor, the Hermes Platinum Award, to two
CME Group initiatives: one for the company’s global corporate adver-
tising campaign and one for the CME Group 2007 Annual Report. The
Hermes Awards represent an international competition for marketing
professionals involved in the conception, writing and design of materi-
als and programs in both traditional and emerging media.
In May, the corporate advertising campaign received a Silver Award
at the Business Marketing Association’s 25th annual Tower Awards, a
prestigious business-to-business marketing and communications
competition. BMA is a premier national service organization for mar-
keting professionals that focuses on improving business-to-business
marketing communications and related marketing techniques.
The corporate advertising campaign also received an Award of
Distinction from the International Academy of the Arts 2008
Communicator Awards. The Communicator Awards is the leading
international awards program, honoring creative excellence for com-
munications professionals.
CME Group also received in May a Merit Award from the Public
Relations Society of America’s Chicago chapter for its employee
communications program, “The Confidence to Lead” launching the
new company and its brand internally. PRSA is the world’s largest
organization for public relations practitioners.
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CME Group Earns Top Honors
Ad Campaign, Annual Report and Employee Communications Program Are Winners
Accurate, timely market data is critical
to the smooth functioning of financial
markets. Recently acquired CMA has
made its mark by being the leading
provider of pricing information to the
over-the-counter credit derivatives market.
To further increase its presence in the over-
the-counter (OTC) marketplace, CME Group
acquired Credit Market Analysis Limited (CMA),
a leading provider of credit derivatives market
data, in March. CMAwill provide CME Group with
greater exposure to the credit derivatives market
and the opportunity to leverage clearing, technol-
ogy and trade execution capabilities to deliver
greater value and efficiencies to the marketplace.
In looking for a partner to help grow the
business, CMA Chief Executive Officer Laurent
Paulhac felt it was important to become part of
a company that would help CMA increase mar-
ket liquidity and transparency. The answer was
an exchange – like CME Group – that offers
strong clearing capabilities and which would not
compromise CMA’s neutrality.
“By becoming part of CME Group, we are
able to maintain our status as an independent
provider of credit derivative market data within a
company that shares our commitment to
improving market transparency and liquidity,”
says Paulhac. “With CME Group’s support, we
can further enhance the effectiveness of OTC
credit market professionals. This move will take
CMA’s business to new levels, enabling us to
expand our product line and explore opportuni-
ties within and beyond the credit derivatives
market. Taking the longer view, we will leverage
synergies between CMA’s products and CME
Group’s market data and trading-related capa-
bilities to provide greater market transparency
and to better serve the market.”
CMA is based in London, with a New York
office. The company was started in 2001 by a
group of credit market participants who saw an
opportunity to better organize the flow of infor-
mation and improve transparency in the credit
derivatives market.
CMA currently offers two products to OTC
credit derivative market participants, primarily
focused on asset managers, hedge funds and
other buy-side participants. The company’s
innovative flagship price discovery tool,
QuoteVision, provides a clear structured view of
live indicative quotes. QuoteVision capitalizes on
the e-mail-based quoting model prevalent in the
credit default swap market. Traders can receive
thousands of e-mails a day containing pricing
information. QuoteVision enables them to view,
organize and store quotes that they receive in real
time, regardless of format. The CMA DataVision
end-of-day pricing service, another key product
offering, provides objective buy side consensus
price verification data, enabling organizations to
have a true market view and more accurately
evaluate their end-of-day positions.
CMAserves a range of financial institutions,
primarily on the buy side. Customers include
hedge funds, asset managers, and buy-side
desks of global investment banks. QuoteVision
users are front office, typically traders and port-
folio managers, while DataVision is geared to
meet the needs of risk managers, controllers
and researchers.
Looking ahead, Paulhac sees opportunities
in helping customers to leverage the
QuoteVision and DataVision data. “Our goal is to
help our clients go as fast as possible from
receiving information to making decisions,” says
Paulhac. A version of QuoteVision for the lever-
aged loan market, a market in which many CMA
customers are active, is in the final stages of
beta testing with customers. Also in the works
are a number of initiatives relating to analytics,
including AlphaVision, a tool that will allow cus-
tomers to leverage the DataVision information in
their trading strategies.
For more information about CMA, please visit the
company’s Web site at www.cmavision.com.
DataVision end-of-day
pricing service, another
key product offering, provides
objective buy-side consensus
price verification data.
41 SPRING 2008
CMA Chief Executive Officer Laurent Paulhac
CME Group to host inaugural
Global Financial Leadership Conference
CME Group announced plans to host a new
event that will bring together top executives
from the world’s leading financial institutions.
Featuring keynote speakers Tony Blair, former
prime minister of Great Britain and Northern
Ireland, and Paul Volcker, former chairman of
the Federal Reserve, the inaugural Global
Financial Leadership Conference will take place
Sept. 15-17, 2008, at the Ritz-Carlton Golf
Resort in Naples, Fla.
“The gathering of leaders in the financial
industry, from hedge funds and banks to broker-
age firms and futures commission merchants,
will provide a high-level environment to discuss
the most important trends in global finance,”
says CME Group Executive Chairman Terry
Duffy. “As financial markets continue to con-
verge and volatility rises, the time is right to
address the vital issues of utmost relevance in
today’s increasingly challenging environment.”
“We are pleased to sponsor this forum to
provide participants with in-depth analysis
from respected members of the business,
financial and political community, the chance
to address the long-term impact of market
changes, and the opportunity to interact and
share ideas with peers in the field,” says CME
Group Chief Executive Officer Craig Donohue.
“The Global Financial Leadership Conference
will enable attendees from around the world
to benefit from interaction with some of the
most successful and respected individuals in
the financial services industry.”
In addition to the high-profile keynote
speakers, the invitation-only conference fea-
tures an equally compelling roster of industry
opinion leaders, who will discuss emerging
geopolitical trends, debate critical economic
issues and provide insightful perspectives on
future developments.
Confirmed conference speakers to date
include: Dr. David Blitzer, managing director and
chairman of the index committee at Standard &
Poor's; Dr. Steven Bloom, senior vice president
at The NASDAQ Stock Market; Ian Bremmer,
expert on global politics and president of Eurasia
Group; Phillip Falcone, senior managing director
of Harbinger Capital Partners; Nicholas
Gendron, managing director of the fixed income
research department at Lehman Brothers; and
Mark Gildersleeve, president and chief executive
officer of Weather Services International.
Conference topics include:
• Geopolitical trends and their impact on devel-
oped and developing economies
• New opportunities in emerging markets, such
as Brazil, China, India, and Russia
• Long-term effects of the subprime meltdown
• Emerging asset classes – e.g. derivatives
linked to real estate and climate change –
and their roles in sophisticated investment
• Impact of the U.S. presidential election on the
financial sector
For additional information, visit the confer-
ence Web site at www.gflc.com.
“The time is right to
address vital issues of utmost
relevance in today’s increasingly
challenging environment.”
On the green
On Sept. 17, 2008, conference attendees are invited
to participate in the CME Group golf tournament
that will take place at two of the region’s most pres-
tigious golf courses: the Tiburon Golf Club of the
Ritz-Carlton Golf Resort and Twin Eagles Golf Club
of Naples.
The Tiburon, designed by the legendary Greg
Norman, is a 36-hole championship golf course,
home to the PGA Tour and Merrill Lynch Shootout.
Players have the choice of challenging themselves
by teeing off on one of five tee boxes per hole on
courses that are marked by stacked sod wall
bunkers, coquina sand and no rough.
Twin Eagles is the only private golf club in
Southwest Florida that features a course co-
designed by Jack Nicklaus and Jack Nicklaus II, and
another by Gary Player. With its rolling fairways with
generous landing areas and well-bunkered, moder-
ately undulating greens, the course plays host to the
ACE Group Classic and PGAChampions Tour.
• DMCC Licence
• DGCX membership to trade precious metal and currency futures
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• Eurex connectivity via direct lines to the Eurex Dubai Hub
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• Offices are built out, furnished and ready to move into
• Company car and parking spaces
• Strategically located in Dubai
Assistance and advice can be provided to establish:
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• Suitable accommodation
• Schools, clubs, hired help and other local requirements
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