Roger Rutherford is managing director and global head of foreign currency products for the CME Group. Hired in November of 2010 to head CME Group’s global currency trading unit from London, he previously served at CLS Services and EBS. He spoke with JLN’s Doug Ashburn about how he got into the FX space, why CME’s FX products are growing and the potential for China and Russia in the FX space.
Q: Tell us a bit about yourself and, specifically, what drew you to the FX space.
A: It was more “luck” than “judgment,” truth be told. With a bit of help from friends, I had just moved over from the stock market into foreign exchange broking, of which I had not a clue of what they were doing. But, I guess through my character and interaction with them, they thought I would make a decent FX broker, so I decided to go out to London and “kick the tires” and see what they had to offer, and what I saw was obviously very exciting. I started out in “open outcry”in your terms; “voice broking” in our terms, trading $/DM for the biggest voice broker at the time, NW Marsh in London. I worked as a ticket writer, coffee boy, runner. What challenged me the most was the global nature of the business – talk to Hong Kong in the morning and my first two clients were London and Helsinki. Then we would talk to New York later in the day. So, I realized, as soon as I picked up my first phone that I was in a truly international business. I worked for two years in London, then three years in New York. I was 23, working on Wall Street and growing up in Mid-town Manhattan, so it was a really exciting time for me. I spent a total of nine years in New York. I began to see the transition from voice to electronic broking’s effects on the global FX market – first with Reuters getting into the game, then with EBS coming hot on their heels.
Q: So, it was at this point that EBS courted you?
A: Yes; which was nice because it brought me back to London, which was a nice transition back home (analogous to CME actually). In global foreign exchange, they had a significant piece of technology and a brokerage platform, but did not have enough people that knew and understood the market and market participants. So, it was very interesting to see the transition from voice to electronic brokering, and to participate as it grew from 1998 to 2008. Same people; different tools.
Q: Then you went over to the settlement side, to CLS Services?
A: Yes; which was an interesting transition as well. Working for EBS and CLS were most important in preparing me for CME Group – developing an appreciation for the OTC market, one from a transactional, price transparency standpoint, and then with CLS from the settlement side, both playing big parts in the OTC world. The “hands-on” experience, combined with the relationships I developed, will benefit CME going forward. The cash OTC and futures markets have been complementary, and will continue to benefit from each others’ growth. I like that the futures side is growing at a faster pace than the OTC side.
Q: So, this is how you view your relationship with the OTC market – symbiotic, complementary growth – or do you anticipate, further down the road, competing with OTC for market share, such as encouraging the migration of business from OTC to regulated exchanges?
A: We have a well-established futures and options business, complementary in nature to the OTC business. Much of the OTC world is bespoke in nature, and needs to remain bespoke, and if one were to pull it away, it would not operate. You cannot force standardization in certain instruments. There are a lot of benefits to the bespoke markets and a lot of benefits to the characteristics of the futures markets, so they need to continue to complement each other. But, as we have seen the potential to clear OTC, we will grow closer as we grow together.
Q: CME Group FX volume averaged 811,000 contracts per day in 2010, up 10 percent from 2009, reflecting average daily notional value of $107 billion. How does that compare to the other major FX platforms such as EBS and Reuters?
A: I’m glad you pulled out [these growth numbers] because it is something we benchmark ourselves against every month, and I know that EBS does the same against our volumes as well. Using EBS, and since they go on notional dollar value, we, on a monthly basis judge ourselves on notional dollar value. If you look at 2010 over 2009, our volumes actually grew 49 percent, and our options volume grew 140 percent. This is a strong message that we need to get out to the marketplace. If you look at February of this year, where we averaged 127 yards per day (which is the equivalent of $127 billion), EBS averaged 140. We did 90 percent of what they did; that is a key metric for the market to understand. The FX futures market is relevant. With the amount of turnover we do on a daily basis being at 90 percent of what EBS does, it is very difficult to ignore. The cause is two-fold: deep pools of liquidity and transparent, competitive pricing, underscoring the greater need for credit risk mitigation. That is underpinning our growth in FX futures.
Q: What do you see as your strategy, and your plans for the future of CME FX products?
A: We look at two things: first, what is within our grasp and second, what is within our reach? What is within our grasp is what is “closer to home” – untapped areas of growth within our jurisdiction and geography. In the major financial centers of the world, we are still not “maxed out” in terms of the use of CME’s existing products – CME FX futures and options. These are ticking up very nicely, as we see in our comparison to what EBS is doing. Then, there is the risk mitigation side of it, and the significant increase in EFP and block trade activity as well. We are seeing longer-dated instruments being blocked into our exchange, again underpinning the need for credit risk mitigation in the market. EFP is being complemented to the cash market as well, so these are within our grasp.
Looking at what is within our reach, we see growth areas such as a big focus on China – How do we best do business there, and what are the most relevant markets in those regions? Russia is another big focus for us. A lot of people want to trade ruble, or are trying to trade ruble, but settlement is a bit of a challenge. But the trade [denominated in] ruble is starting to spark quite a big interest in the trading of ruble futures. And, again, from a risk mitigation standpoint, EFPs and blocks are becoming growth areas.
After looking at these two strings, we can start to look at the third string, which is new products such as VolX. E-Micros are another area of new product focus – retail-sized contract 1/10th of a standard futures contract. We have seen about 110 percent growth in the last year on e-Micros. Then, we will see how things play out with Clearing Solutions. I would like us to be the “clearer of choice” in OTC FX, when the regulatory landscape becomes a lot clearer.
Q: As we continue our newest project, MarketsReformWiki: what do you see as the impact of Dodd-Frank on CME, and how are you preparing FX products for the new landscape?
A: As you know, this is very difficult to predict, and very frustrating for everyone in this marketplace – trying to monitor what is going on and understand the impact for us and our clients and participants. But, as we have seen in our gross figures above, there is a great appreciation for credit risk mitigation. And, I think if you look at the way the regulations are being written, they are replicating the core principles of what CME Group does anyway – consumer protection, transparency, integrity, and a sound marketplace. So, while it is difficult to predict, I definitely think credit risk mitigation is underpinning our growth.