The cardboard cut-out photo figures of John Damgard, outgoing Futures Industry Association president, dotting the conference venue said it all.
This was the end of an era that began in the 1970s when the US futures markets had only just been invented, years before “pit” trading succumbed to the electronic trading revolution that has swept the derivatives markets.
At the time Damgard, now 70, was an under secretary of agriculture in the Nixon administration where he had a part in the creation of the Commodity Futures Trading Commission, the industry watchdog.
He has handed his post over to Walt Lukken, a man 26 years his junior and a former acting chairman of the CFTC. His last job was head of New York Portfolio Clearing, a business that has pioneered one of the latest developments in the plumbing of the markets: portfolio margining.
The contrast between Damgard – the congressionally connected, politically savvy communicator – with Lukken – an easy-going, sharp, self-confessed “plumber” – can be overdone. The two share a background in Washington.
Lukken is the public face of how the futures markets have changed beyond recognition in that time. And they are set to change further, as exchanges, clearers and banks grapple with a new world of over-the-counter (OTC) products. Acronyms like “LSOC” – legally separated, operationally commingled, a reference to how clearing collateral is handled – would have puzzled those Nixon-era types. But they are the lingua franca of the new generation running this business.
As if to underscore the change, Damgard’s retirement was overshadowed by the surprise announcement by CME Group that its chief executive of eight years, Craig Donohue, was leaving after 23 years at the Chicago-based business.
There was much muttering at the conference that this was at least in part the fallout from the MF Global collapse, which left CME in damage limitation mode as the debacle unfolded. Its shares have fallen sharply from a peak of over $700 before the 2008 crisis.
CME was at pains to insist that Donohue’s departure had nothing to do with MF Global. Donohue himself was clear privately to delegates that he had flagged a desire to quit and regain a family life as far back as a year ago. By the end of the conference, that seemed to have worked.
Donohue’s successor – like Lukken – is focused more on the plumbing. Phupinder Gill takes over in December and will bring to the job his years of expertise in clearing in Chicago.
Yet overshadowing all of this was arguably a much bigger takeaway: something needs to change in the futures business that has evolved in the 30 years since Damgard arrived at the FIA.
That message dropped like a bombshell into the conference, not from a disgruntled trader who had lost money thanks to MF Global, but from Asia – specifically Charles Li, chief executive of Hong Kong Exchanges & Clearing, on his first visit to the Boca event. It’s worth quoting in full what he said:
“We find it amazing that this thing [MF Global] which we thought would not have happened in a western, advanced economy actually could happen here. This is something that we watch[ed] with amazement. Because over the last 3-5 years after the financial crisis, many of us who [were] schooled here in this country in our basic education, particularly in our financial career, we went back there [to Asia] thinking ‘We have a great model of superiority, philosophically and functionally’. And we were essentially preaching the free market and the model that we have here. Not only was it more efficient and innovative, it was also safer and more conservative.
“But [there] was a big, big reckoning. Now we go back and we feel a lot of the things that we believed dearly when we stood here, really, the fundamental legitimacy [of the model] is being threatened and challenged. You can no longer go back and say with a straight face that this model works.”
HKEx is an awakening giant in the global exchange business, with big ambitions in over-the-counter derivatives and commodities. Western exchanges are eyeing it with keen interest, not least because it is the most valuable exchange business in the world by market capitalisation and has an enviable balance sheet.
That probably helped to make Li’s comment sound lecturing. As one senior European exchange executive told me tartly: “Market capitalisation is no measure of capability. It will take them five years to get to the point where they have ‘something’.”
But this need not be about rivalry. The US futures industry could more usefully take this on the chin and use it constructively to win back the confidence lost due to MF Global. Lukken made clear his top priority is winning back any confidence that may have been lost.
Not untypically, China has already been working on its own methods for customer fund protection, the issue central to the MF Global failure.
Gary DeWaal, general counsel at Newedge, the broker, was in China meeting officials to learn more. He thinks the Chinese model could offer valuable lessons for the west.
The futures industry should follow up, if it is to prove that – in Damgard’s words – MF Global was only”a black eye rather than permanent damage”.
After all it may not be going too far to say that in time, China – a country brought in from the cold by the Nixon administration in which Damgard served – could be the biggest source of business for the futures industry.
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