CME chairman makes Asian debut

Terry Duffy, executive chairman of CME Group, set out his stall rather predictably in a speech at the Foreign Correspondents' Club (FCC) in Hong Kong yesterday.

He opined on the importance of risk management, the security of exchange-traded and cleared products and the benefits of transparency, among other things -- hardly surprising, coming from the boss of the world's biggest futures and options exchange. Talk of helping to restore investor confidence in the global financial system also had a familar strain, though admittedly CME is better placed to assist on this front than many institutions.

Rather more startling was the revelation that this was Duffy's first visit not only to Hong Kong, but to Asia, some three years after the CME set up shop in the city. He expects to make many more trips out here, although for what purpose is not yet clear, quipped FCC president Tom Mitchell in his introductory patter.

In announcing this event earlier in the week, Mitchell mentioned that he'd said that "the chairman of the China Mercantile Exchange" was coming to speak at the FCC. "Now, you never know," joked Mitchell, also a Financial Times correspondent. "But then, for all I know, Terry's going to tell us that he's just bought Hong Kong Exchanges & Clearing and the Shanghai Stock Exchange, because, after all, the CME does already own the Chicago Mercantile Exchange, Chicago Board of Trade and Nymex [the New York Mercantile Exchange]."

While much of his presentation was run-of-the-mill stuff, Duffy did quote some head-turning figures. CME Group last year facilitated trading of 3 billion futures and options contracts, representing an underlying value of more than $1 quadrillion, 20 times global GDP. It holds more than $100 billion of collateral to support the transactions in its markets. Moreover, the group twice a day moves $6 billion-10 billion of funds between its market participants, he said, and has "never lost a dollar" of its clients' money.

Duffy also spoke about how the exchange is working with regulators to help prevent a re-run of the recent crisis. He cited as one example the "hard limits" the group has proposed for its energy products in a recent white paper, in response to moves to limit the amount speculators can trade in energy and commodity markets. He elaborated on this after his speech in response to a question seeking further clarification.

"There are a handful of people in Washington who believe that speculators have taken [the oil market] up to levels it shouldn't go to -- even though they won't pay a bit of attention to the price of gold, another inflationary product, which has gone up to $1,050 an ounce," says Duffy. "That's okay, apparently, because it's all about WTI [West Texas Intermediate crude oil] or Brent."

Another question from the floor sought Duffy's opinion on whether he feels there is a market for global cash equity. "A global cash equity market is a very interesting concept," he said, "but one reason I don't think it'll come to fruition is because of high correlation among equity products."

The Financial Times' Mitchell raised the issue of penetrating the Chinese market. He put it to Duffy that one benefit of the CME's regional hubs -- that they allow it "to effectively bring market participants back to Chicago" and provide them with very fast and efficient trading -- may not be something the Chinese government wants to hear. "So what are the options for working with the government or parties there?" asked Mitchell.

Duffy replied: "The appetite to manage risk in all products is going to continue to be more global, and I don't see how China is going to stay out of that equation. Market participants are going to look for other ways to diversify their risk, and the most efficient way to do that is through financial futures. So I see that becoming a part of their financial make-up eventually -- the question is, when."

CME Group is well positioned to work with governments and institutions in China and elsewhere in Asia to help their markets develop, added Duffy. "Is it going to be a challenge? Absolutely, but we haven't got to where we are today without challenges."