FIA EXPO Day One Overview

Thom Thompson

Thom Thompson

Editor

FIA EXPO rolled into the Hilton on South Michigan Avenue Tuesday night as it does about this time every year. Ending midway through Thursday afternoon, it seems shorter this year, with fewer sessions, attendees and exhibitors.

EXPO 2019 is still a big event, make no mistake. CME hosted an opening night gala on Tuesday. There was a big-ish name speaker at the conference lunch Wednesday – Doris Kearns Goodwin, the historian and author. There are plenty of off-campus parties that quasi require invitations.  The current chairman of the Commodity Futures Trading Commission, Dr. Heath Tarbert, was the headliner, kicking off the conference with a 9 a.m. speech. 

Oddly enough, Tarbert’s speech will not be published on the CFTC website. (Perhaps he is reluctant to post his musings on the CFTC website after he and his commission got in so much trouble with the federal courts for what they posted about Kraft/Mondelez just this past August.)

According to FIA, the speech is viewable here on Vimeo, so instead of reading it quickly and conveniently on your own, you can watch the thing in its full length.

An expression I avoid despite its popularity over the past ten years is “meh,” but the first day of EXPO 2019 seemed to be “meh.” With industry-wide trading volumes up 18% this year over last year, there is a dearth of industry-wide burning issues for panelists to chew on.  

At the first session, the handful of exchange leaders convened for a group hug on the status quo. Americans dominated the hour with Eurex CEO Thomas Book thrown in for some Continental flare. The panel, which also included Cboe, CME, ICE and Nasdaq, embraced government regulation somewhat because it reassured customers as to the legitimacy of the industry. The panelists also acknowledged that the Dodd Frank Act as well as subsequent regulation drove business to their exchanges and, with uncleared margin requirements on the horizon, will continue to do so.  

Cboe complained indirectly about the prudential regulators’ leverage ratio and how detrimental it is for their business.  Plugging his year-old acquisition of NEX, CME CEO Terry Duffy extolled the benefits of “capital efficiency, ” saying that CME’s attention to providing capital efficiency let it return $5.7 billion in margin to customers.   

As they moved through their agenda, the panel got a little wound up when Duffy protested strongly against a recent paper published by the bulge bracket clearing firms. It apparently calls for, among other things, greater contributions from the clearing houses to the default “waterfall.” Duffy strongly advocated for the idea that the clearing houses and exchanges don’t bring risk to the table and should not be expected to mitigate the risks of those that do. Duffy was really quite passionate about it, which was good to see, but since the panel was all pretty much on the same page his enthusiasm just wilted away. It would have been exciting for a debate to erupt between exchanges and FCMs, but there were no brokers on the panel. Instead, we got Eurex’s Book speaking calmly regarding his concerns about weakening risk sharing among clearing members that has provided the basis of derivatives clearing since, well, forever. No one noticed the irony that all of the clearinghouses on the panel already financially participate in their default waterfalls. “If it is such a dangerous threat to risk mutualization, why do the clearing houses do it in the first place?” asked no one. 

A subsequent panel about the health of the industry included CME (Bryan Durkin), ICE (David Goone), FCMs (RJ O’Brien and Citi), and a couple of regulator types (current CFTC Commissioner Dan Berkovitz and former CFTC Commissioner Sharon Bowen) talking about the strides the industry has made since the 2008 financial crisis, thanks, of course, to the Dodd Frank Act. Everyone seemed very satisfied for the first half an hour or so, but then the elephant in the room roused itself and one of the FCMs pointed out that since 2008 the market values of exchanges has risen “1,000%,” even as the number of FCMs has declined to about 75 today. Bowen had earlier pointed out that she is concerned about the decreasing number of some participants (exchanges? CCPs? “We need more than two telephone companies . . .”) and this was echoed by Berkovitz who noted that when you get down to seven big clearers, there is not a lot of opportunity for mutualization. The FCMs said that there is a disequilibrium in the industry. According with the tone of the day, no suggestions for change were offered, nothing bruited about. Conflict was averted. 

As in the earlier exchange leaders panel, the discussion turned to consolidation and concentration in the derivatives industry. There are fewer exchanges and fewer brokers, yet the industry is growing in terms of volumes, open interest, products traded, and industries served. Margin levels are scientifically set and are therefore accurate, yet they are only adequate compared to the needs of the last crisis, not the next, unknown one. At the end of the panel a question from the audience pointed up the anomaly of exchanges worrying about capital efficiency and getting money back into customers’ pockets while the industry is worrying that it might not be ready for the next default. Maybe there shouldn’t be so much attention paid to capital efficiency?

Despite being filled with talk about cannabis and bitcoin, Wednesday afternoon at EXPO still lacked dramatic tension. The big new product that everyone likes to think is somewhere just over the horizon (just over a rainbow?) is THC-rich cannabis – marijuana. Trabue Bland,  president of ICE Futures US, said that the potential product he gets asked about most is marijuana futures. Jay Caauwe (formerly with Cboe, now with Supercritical) and Julie Lerner of PanXchange, which trades industrial hemp, put paid to that idea not for regulatory but for commercial reasons. Lerner said that marijuana had become a  “branded” consumer good, akin to grape varieties: no grape futures and likely no marijuana futures anytime soon. Caauwe reinforced Lerner’s point by reminding the audience that marijuana was moving mainstream because of its medical properties yet it is being marketed and consumed regardless of specific differentiating product attributes. 

As to bitcoin, well, there is no news that we don’t already know. In addition to a well-attended session regarding bitcoin sponsored by ErisX, itself a bitcoin exchange, cryptocurrencies were featured on two panels. During the Law and Compliance Division panel, speakers provided an overview of the high points in recent regulatory developments. The panel had representatives from both Bakkt (but not ICE Futures US) and ErisX.  There was no one from the CME, home of the only successful bitcoin futures contract. (During the leaders panel in the morning, CME CEO Duffy had contended that cryptocurrencies are not going to be a big thing for the industry.) There was plenty of ground to cover and the panel left at least me with some questions about both offerings. Bakkt, as was pointed out, is not a CFTC registrant yet it seems to have a (CFTC-approved?) plan for sharing losses in the event of a hack – so how would losses be allocated? ErisX often says, as it did again at EXPO, that it will offer spot and futures on the same platform – how would that work, since the spot half of that platform is not regulated? ErisX said that it will launch its futures in the next two months.

I noticed that there was a panel on diversity in derivatives in the morning. Is that where all the women were all day? Because everywhere else it seemed to be an 85% sea of men. The exhibit hall was especially male. There are very few African-American or Hispanic participants this year, as with other years. FIA launched an initiative on diversity earlier this year but it does not seem to have had much success so far. 

The non-U.S. component of the industry is very well-represented among the exhibitors but not among panelists. There are a number of Asian exhibitors representing the major exchanges but there was no mention of Asian business at the six panels I went to. A scan of the attendees list also showed fewer attendees from outside the U.S. than I remember from other years. This could be a sign of the overwhelming dominance of the U.S. futures industry, or it might indicate a blind spot which could turn into a business vulnerability. 

Thursday is the second and final day of EXPO 2019. The Thursday program is about one-third shorter than Wednesday’s full-day schedule.

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