swiss review derivatives - · pdf fileresume.inspiteofthis,wewill ... mr. jignesh shah, vice...

SWISSDERIVATIVESISSUE 40 – SUMMER 2009

Review

Official publication of the Swiss Futures and Options Association, SFOA.

Focus

Emerging Economies

30th SFOABürgenstock Meeting

Event

Free Options Help Desk | Free Local Seminars | Software | Online Classes | Position Simulator | Strategy Screener

Options involve risk and are not suitable for all investors. Individuals should not enter into Options transactions until they have read and understood the risk disclosure document, Characteristics and Risks ofStandardized Options, available by calling 1-888-OPTIONS or by visiting OptionsEducation.org. None of the information in this ad should be construed as a recommendation to buy or sell a security or to provideinvestment advice. ©2009 The Options Industry Council. All rights reserved.

Did you know that Options can be a conservative investor’s greatestally in managing risk? So when the proverbial storm hits, you can beready. To learn how, go to OptionsEducation.org or contact yourFinancial Advisor.

Table of Contents

Contents

3

EditorialPaul Meier, SFOA 5

Focus – Emerging EconomiesEmerging markets after the crisis: Lessons learned 6

Diwakar Jagannath, Ikon Global MarketsSMX: the first pan-Asian commodity exchange 8

Thomas J. McMahon, Singapore Mercantile ExchangeSuccessful experience of TAIFEX 10

Andy Yeh, Taiwan Futures ExchangeTurkDEX within the global financial system under scrutiny 12

Yaman Basaran, Turkish Derivatives ExchangeWarehouse receipts: Bridging the gap between global tradersand emerging markets 14

Chip Dempsey, ConsultantDerivatives and emerging markets – a polemic based in Russian experience 18

Dr. Max Gutbrod, Baker & McKenzieRomania: A new presence on the derivatives map 20

Septimiu Stoica, Romanian Commodities ExchangeCarbon markets in transition 22

Eric C. Bettelheim, Sustainable Forestry ManagementThe future carbon market 24

Geir Reigstad, NASDAQ OMX Commodities

EventProgramme of the 30th SFOA Derivatives Conference in Interlaken 26Review of the 12th Annual Conference of AFM in Budapest 30

Krisztina Kasza, AFM

RReegguullaattiioonnBetter Late Than Never: U.S. Senate Finally Confirms the New Chairmanof the CFTC 36

C. Robert Paul, DLA Piper

CommoditiesPrecious Metals: the proven calm in the storm 40

Andy Maag, UBS Commodity DeskEurex’s entry into the commodities space 42

Ralf Huesmann, Eurex Product Strategy

CareerGlobalization of financial engineering: the impact of the economic crisis 44

Dr. Mark Holder, Kent State UniversityCooperation beats competition when educating investors 46

Jim Binder, OIC and OCCHope in the gloom? 48

Sarah Butcher, eFinancialCareers

Structured ProductsStructured products: lessons learned from the financial crisis 50

Roger Studer, Swiss Structured Products AssociationCollateralized Certificates Minimize Issuer Risk 51

Georg von Wattenwyl, Bank Vontobel

Agenda 52

Organisations 53

People 54

Issue 40 – Summer 2009

Circulation and Print Run 10,000Total estimated readers >20,000

Publisher, Advertisement, SubscriptionWeber-Thedy AGCorporate & Financial CommunicationsTimo Kueng, Claudia KellerZeltweg 25, CH-8032 Zurich, [email protected]@weber-thedy.comPhone +41 44 266 15 80Fax +41 44 266 15 81

ProductionSchwabe AGFarnsburgerstrasse 8, CH-4132 MuttenzPhone +41 61 467 85 85Fax +41 61 467 85 [email protected], www.schwabe.ch

Official Publication of

SFOA – Swiss Futures and OptionsAssociationMs. Carol Gregoir, Secretary General18b, rue du Gothard, P.O. Box 325CH-1225 Chêne-Bourg, SwitzerlandPhone +41 22 860 21 03Fax +41 22 860 21 15www.sfoa.org

AFM – Association of Futures MarketsMs. Krisztina Kasza, Secretary GeneralRácz Aladár út 261121 Budapest / HungaryPhone +36 30 34 35 [email protected] / www.afmorg.net

SAMT – Swiss Association of MarketTechniciansc/o Bruno Estier22, chemin Rieu,CH-1208 Geneva, SwitzerlandFax +41 22 346 90 [email protected], www.samt-org.ch

Cover pictureOld dhows and Doha Skyline, Qatar.

S W I S SF U T U R E SA N DO P T I O N SASSOCIATION

SWISS DERIVATIVES REVIEW 40 – SUMMER 2009

New from Eurex and ISE.More ways to trade US optionsfrom anywhere in the world.

Get ready to connect to the world’s largest equityoptions exchange. The Eurex/ISE Link will bringyou direct and seamless access to US options. Thatmeans fewer regulatory hurdles. No time loss whenplacing an order. No major software upgrades. And

all the efficiency, security and integrity you’ve alwayshad with Eurex Clearing. So from late 2009,* you’llbe free to take your pick of ISE’s most liquid USoptions. It’s a whole new world to look forward to.www.eurex-ise.com

*Pending regulatory approval.Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of ‘Characteristics and Risks of Standardized Options’. Copies may be obtained fromyour broker or from the International Securities Exchange by calling +1 (212) 943-2400 or by writing to ISE at 60 Broad Street, New York, NY 10004. Eurex and ISE are registered trademarks.

Dear Members and Friends of the SFOA,

A long and hard winter has come to an end – in more ways than one? Weatherwise,of course, we should not complain. After all, for so long we had said “too bad, wedo not have real winters anymore” – now we had one and I hope you could enjoy it!Marketwise, let’s hope spring has sprung as well and politicians will not kill thegently growing new plants with overkill and over-regulation!

It is the little things that usually make for a lot of happiness. One of these was aphone call that our CEO, Paul-André Jacot received early March. “Congratulations,Paul-André, you have been elected to the FIA Hall of Fame and we would like you toparticipate at the induction.” A great honor for a great guy, who richly deserved it.His untiring involvement in our Association for the benefit of the whole industry isfantastic and – I hope – will go on for a long time to come. Active since inception anda Board Member for the last 25 years, he has been instrumental in shaping theAssociation and especially our flagship Bürgenstock conference. My heartiest con-gratulations, Paul-André!

Developing Markets are going thru difficult times just like everyone else and are fac-ing often a tough future. Therefore we decided to devote this issue to these marketsand are doing it in two ways: a review of the recent AFM Conference in Budapest,the annual gathering of the emerging and developed derivatives markets as well as aseries of articles looking at different markets and issues confronting them.

You will also find a first outline of the upcoming Bürgenstock Conference which willtake place September 9 to 12, 2009 in Interlaken. Hard to believe, but it is our30th anniversary! We will update our website regularly www.sfoa.org (then click on‘Bürgenstock Meetings’), so please visit it for the latest information. We have a veryinteresting series of discussions planned, and celebrating our Anniversary will offeryou a very special Swiss night, including a private performance of the world-renowned “Mummenschanz”, a unique “visual theatre group”, that performed theworld over, among others on Broadway from 1977 to 1979! I suggest you sign upearly to make sure to have a room and also to facilitate work a bit for our Secretariat!

I am looking forward to meeting you latest at the Bürgenstock conference inInterlaken. In the meantime, I wish you a great summer and good fortune in yourundertakings.

Sincerely,

Paul MeierChairman SFOA


Dear Membersand Friends of the SFOA

Editorial

5

Emerging markets afterthe crisis: Lessons learned“After the turmoil of 2008, I found myself asking what it really means to be in an ‘emerging market’.Having witnessed the destruction of untold wealth, liquidation of ‘venerable’ firms and the governmentinstituting policies once unheard of (especially under a conservative regime), it dawned on me that per-haps my definitions needed to be updated,” says IKON’s Diwakar Jagannath.

6

Focus

Can we say any more that the policies of the ‘Tiger economies’,Russia or Latin America were ruinous relative to whatoccurred in the United States, United Kingdom or Europe? Tobe sure, the one theme I think we can all agree upon is: whetheryou are an emerging or developed economy, an absence ofmeaningful regulation will lead to a suboptimal outcome.Which leads to an interesting dilemma: how will those emerg-ing markets that did not participate in the wholesale collapse oftoxic assets, but suffered theconsequences of the global eco-nomic slowdown, react to theidea of free markets?In the many years that my

firm and I have spent in emerg-ing markets, whether as aprovider of liquidity, an advo-cate for exchanges or as a pro-moter of reform, we have madeclear our commitment to thedevelopment of free markets.Much to our surprise, we havefound that in spite of the eco-nomic and reputational damagecreated due to the current environment, emerging marketeconomies still have faith in free markets (albeit with strict con-trols). The expected retraction, which would be completelyunderstandable, has not surfaced. The usual populism andbacklash against greed has remained directed towards westernbankers rather than towards local politicians. One could arguethat there is more outrage in the US and UK versus India orChina. The era of globalization, certainly has tied everyone’sfortunes together.Nowhere is this synergy more apparent than in the foreign

exchange markets. During the events of last fall, the dollarbegan a steady climb versus every major currency (bar the Yen)in a desperate flight to quality. Add to this a massive credit andliquidity squeeze and people rushed for the greenback. Riskassets and interest arbitrages (carry trade) were liquidated. Asa result, implied volatility skyrocketed. The US dollar wasinversely correlated to the performance of the US equity mar-kets. When stock markets rallied, the dollar lost ground andwhen they fell, the dollar was strong. Whereas ‘cheap’ credit ofthe past years drove investors to find higher yield, now was thetime to forget yield and focus on safety.As the dust started to clear (or more appropriately when

casualties appeared) everyone got a clear sense of the reach ofthis economic implosion. Eastern Europe, Russia, the Nordics,Ireland, all countries that lured capital and sought yield felt theimpact.

So, where do we go from here, and are there opportunitiesin the emerging markets trade? Although many emerging mar-ket countries did not participate in the toxic brew that deliv-ered the financial chaos, they nevertheless felt its impact. Muchheralded globalization as we now know is both good and bad:when the US has a cold, Asia has the flu. Exports out of Indiaand China have dropped dramatically. Once high flying growthengines have shifted down and forecasts revised. As consump-

tion and spending in the devel-oped world continue to contract,exporters continue to seek buyers.It will take time for built-up

inventory to be depleted and nor-malized production levels toresume. In spite of this, we willstill see moderate growth in Indiaand China and assuming thatcommodity prices stay relativelycalm, these countries will, on bal-ance, fare better than others.Asian equity markets will havebetter recovery cycles because, asdemand returns to most import

economies, they will continue to be the suppliers. Most Asiancountries will fare better through this crisis because, unlike thelate 1990s, they have larger central bank reserves.From our trading perspective, the place to be will continue

to be in Asia: specifically India and China. Over the past year,India has opened many new exchanges (commodity, currencyand equity). Once taboo, the Indian government has permittedtrade on the Rupee through regulated exchanges. They evenspeak now of permitting options on the Rupee! ThroughoutAsia (Thailand, Malaysia, Singapore, Hong Kong and China)bourses are being planned, organized and coming online. Manyof these exchanges may be xenophobic (restricting the partici-pation of foreign investors), but these are steps to greater trans-parency, liquidity and – eventually – open markets. Add to thisthe fact that all of these exchanges are technically advanced,making connectivity easier.Products may be centric to the local economy, but innova-

tion will come from environmental products, such as carboncredits. Perhaps the one lesson that this crisis has taught emerg-ing market governments is that while free trade is needed, theirstaid notions of regulatory oversight may be better appreciat-ed. This will give rise to quasi public/private clearing entities,centralized clearing for a multitude of products (even OTCproducts) and cross border regulatory cooperation.It may be all too optimistic a scenario and we certainly do

not join the list of fortune tellers, but the markets seem to be


“In spite of the damagecreated by the crisis,emerging marketsstill have faith in freemarkets.”


telling us that we are headed towards a recovery sometime inlate 2009 / beginning 2010. Where, when and how is not clear,but the hangover from our recent past and the reality of thefuture will be borne out in the risk appetite of investors. Whenthe US dollar depreciates and investors once again search forthat extra basis of yield, they will come calling on the countriesin the emerging markets.Inflation will, once again, be a part of our daily worries.

Memories of changed habitsand contracting consumerismwill be distant. Standing at theready again will be China,India and the rest of theemerging economies. A bigrisk to all of this of course ispolitical. The results of themonth long elections in Indiaprovided the ruling Congressparty with an implicit mandateto continue economic reforms.Congress no longer needs toconsult with the Communistparty to build consensus.Indian equity markets reacted with a 17 percent rally and theRupee appreciated against the dollar by close to 5 percent.Analysts revised forecasts and now envision net capitalinflows into India and a further appreciation of the Rupee.

However, one must remember that the euphoria over the elec-tion results will be tempered by reality once the electoratedemands results for their votes.Furthermore, both politicians and the electorate face a

daunting task in trying to reconcile the need for free marketswithout the burden of ‘rampant speculation’. In the past year,as commodity prices soared, the government imposed pricecontrols and went as far as to suspend trading of key com-

modities on the exchanges.There is a delicate balance tobe achieved in promotingreform whilst trying to feed1 billion people. One cannotreadily plan for these scenar-ios, but suffice it to say: mostemerging market tradersalways have both eyes wideopen.A final thought: I have been

paying keen attention to theemergence of exchanges inAfrica and the notion of pricediscovery to a wider group of

people. We have all, at one time or another, wished for eco-nomic success to come to this land. I hope I can speak of direct-ing trading flows and making markets in Africa in the not toodistant future.

Focus

7

“When the dollar depreci-ates and investors onceagain search for the extrabasis of yield, they willcome calling on theemerging economies.”

Diwakar Jagannath is ManagingDirector and CEO of IKONGLOBAL MARKETS, Inc.99 Wall Street, 11th floor,New York, NY 10005

Contact: [email protected]

8

Focus

While some of the regional commodity markets in China, Indiaand Japan have seen exchange traded commodity business flour-ish, there has been a need for interconnecting all the markets forsynchronization of gaps between physical trading and deriva-tives hedging, effective bridge for global price discovery and riskmanagement, multiple connectivity options and counterpartyguarantee with clearing and settlement guaranteed for marketparticipants across entire Asia.Singapore is strategically placed at the crossroads of Asia. The

established exchanges in the global arena have had limited rele-vance to Asia due to time zone differences and the types of prod-ucts traded. Also, Asia is currently home to a number of frag-mented exchanges. Many of these exchanges are large, but oper-ate within markets with relatively restricted international access.Market participants seek an integrated, single window for multi-ple products, where none currently exists. Collectively, they seekmultiple alternative ways to connect into a trusted trading engine,selecting from a wide variety of order management systems.To fill this gap, Financial Technologies has set up Singapore

Mercantile Exchange (SMX) to plug the need for an interna-tional mercantile exchange in the eastern hemisphere with trans-parent price discovery and benchmarking, secure clearing, settle-ment, risk warehousing, and management. The SMX appliesFinancial Technologies’ proven state-of-the-art exchange tech-nology to provide this accessible, transparent platform for trad-ing, clearing and settlement.SMX is a next generation global commodities derivatives

exchange for trading futures, options and other derivatives acrossmultiple asset classes. Based in Singapore with a pan-Asian scope,SMX offers an advanced technology multi-product electronictrading platform, accessible from anywhere in the world.SMX will be offering a wide spectrum of global, Asian, and

new generation commodities, currencies and indices. Theexchange will bring about the most efficient price discovery ofcommodities consumed or produced in large quantities in Asia.The product offerings at SMX will include Metals, Energy,Agriculture, Currencies and various Indices.SMX will be regulated by the Monetary Authority of

Singapore – the regulator for commodity markets in Singapore.SMX has the support of the International Enterprise ofSingapore and the Singapore Economic Development Board.SMX is also a member of global trade associations like theAssociation of Futures Markets (AFM), the Futures IndustryAssociation (FIA), the Singapore Commodity Exchange, theSwiss Futures and Options Associations (SFOA) and the Futuresand Options Associations (FOA).By funneling into a single pool what previously flowed into

separate liquidity streams, SMX will serve as a single vital tribu-tary for international commerce: it will connect the worlds ofphysical and paper trading; link trade flows between Asia-Pacificand the world; bridge the needs of traders, hedgers andinvestors, and risk managers across time zones for price settingand reference pricing. The SMX has a clearing house, SMXCC,

which will encourage OTC participants to trade on theexchange, to avoid counterparty risk.SMX is playing a role in creating a paradigm-shifting market

platform in Asia, a region which is gradually transforming frombeing a price-taker to a price-setter. Asia is home to more thanhalf the world’s population and is a major producer and/or con-sumer of every tradable asset class – yet, has hardly influencedprices in modern times. Through its transparent, electronic andeasily accessible exchange platform in Singapore, SMX is poisedto emerge as a major platform for price discovery, risk mitigationand warehousing in multiple asset classes in Asia, the region towhich the locus of economic activity is clearly shifting.The SMX leadership has one of the best global experiences in

exchange operations. While I am happy to contribute from expe-riences in NYMEX and HKMEX, SMX will be supported byMr. Ang Swee Tian, Chairman of the SMX Board of Directors,a widely recognized and distinguished veteran of the futuresindustry, Mr. Jignesh Shah, Vice Chairman of SMX andChairman & CEO of Financial Technologies Group, NobelLaureate Mr. Myron Scholes, Member of SMX’ Advisory board,Mr. Tan Soo Nan, Member of SMX Board and former CEO ofTemasek Capital and Senior Managing Director of DBS Bank,Mr. V. Hariharan, Director of SMX and Director – Strategy ofFinancial Technologies (India) Limited, and Mr. Joseph Massey,Director of SMX and MD & CEO of MCX.The value of the SMX proposition is underpinned by its busi-

ness and regulatory environment, which engenders trust and con-fidence. Singapore has consistently ranked among the most favor-able business jurisdictions of the ‘first world’, reinforced by itsrole as a major global financial and physical trading hub.SMX’ ability to execute well is enhanced by the commitment

of our sponsors and the drive of our talented team. FinancialTechnologies has a history of unlocking value by creating newmar-kets. Its award-winning technologies, architected and developedinternally, have been vertically integrated with exchanges down-stream, thus initiating new revenue sources for its shareholders.


Thomas J. McMahon is theManaging Director and ChiefExecutive Officer of SingaporeMercantile Exchange (SMX), thefirst pan-Asian global commodityexchange. A veteran with 25 yearsexperience in derivatives and com-modities across Asia and USA,McMahon was the former director

at NYMEX Asia. In his last stint prior to joining SMX,he was heading the Hong Kong Mercantile Exchange(HKMEX). He possesses a deep understanding of theAsian financial and derivative markets having lived andworked in Tokyo, Singapore and Hong Kong for pastseveral years.Contact: [email protected], www.smx.com.sg

SMX: the first pan-Asian commodityexchange – where the world will tradeCommodity trading in Asia dates back centuries with various major trade channels like the Silk Route, the

Incense Route and the Spice Route, all originating from Asia. Today, Asia has the widest range of commodity

baskets to trade in, including agro-commodities, bullions, metals and energy.

Great minds think alike... and radically different.

Global markets in clear view theice.comIntercontinentalExchangeisaregisteredtrademarkofIntercontinentalExchange,Inc.,registeredintheUnitedStatesandtheEuropeanUnion.ICE,ICEBlock,ICEDataandICEFuturesareRegisteredTrademarksofIntercontinentalExchange,Inc.,registeredintheUnitedStates,theEuropeanUnionandSingapore.

Successful experienceof TAIFEXThe total trading volume on the Taiwan Futures Exchange (TAIFEX) in 2008 came to an all-time high of

136,719,777 contracts, up by 18.73%, from 115,150,624 contracts in 2007. This rate of growth was even

higher than the global average of 13.7%. In the Futures Industry Magazine’s annual ranking of the world’s

futures exchanges, TAIFEX came in 17th place in 2008 in terms of futures and options trading volume.

10

Focus

The accomplishments were due primarily to the several newproducts launched and new measures introduced (see the table)over the course of the year. To pave the way for these new ini-tiatives, TAIFEX held dozens of dialogue sessions with partiessuch as the Chinese National Futures Association, brokers,market makers, and dealers, so as to gather their views andfeedback. Once a strong consensus was reached, the imple-mentation phase followed. The process has ensured that mar-ket needs are adequately met, as evidenced from the rapidgrowth and record-setting trading activities.TAIFEX offers a diverse range of products, which include

instruments based on stockindexes, individual stocks,interest rates, and commodi-ties. The trading volume ofTAIEX Futures and Mini-TAIEX Futures surged strong-ly last year, at a growth rate of67% and 205% respectively,thanks to the successful imple-mentation of various initia-tives, coupled with the reduc-tion of futures transaction tax.As of 17 March 2009, thetrading volume of TAIEXFutures was 1.91 times the MSCI Taiwan Index Futures inSingapore, and 2.99 times its value, indicating that the competi-tiveness of the Taiwan’s futures market is on par with interna-tional markets. Thus, the TAIEX Futures and the flagship prod-uct, TAIEX Options have become excellent hedging and pricediscovery instruments for investors in the Taiwan’s stock market.In January 2008, TAIFEX launched NT Dollar Gold Futures

with contract specifications designed specifically to suit thepreferences of local traders in Taiwan. Since its launch, theaverage daily trading volume of NT Dollar Gold Futures hasexceeded 20,000 contracts, making it the fourth most activelytraded Gold Futures contract in the world, and the 18th mostactive contract in the category of metal futures and options. Toprovide traders with a more diverse range of trading strategies,TAIFEX in January 2009 launched a new NT Dollar GoldOptions contract which has been trading at an average of over40,000 contracts per day. TAIFEX has thus found success in itsventure on commodities derivatives. With the successful launchof NTD Gold Futures and Gold Options, TAIFEX now offerstraders the opportunities to employ inter-exchange GoldFutures trading strategies.Separately, changes have also been made to the single-stock

options contracts (STO). Since the modification of STO con-tract specifications and switching to cash settlement in 2009,

the STO average daily trading volume has increased to morethan 60,000 contracts, over 10 times what it was before.Foreign institutional investors accounted for 24.3% of total

trading value on the Taiwan Stock Exchange in 2008, whichmeans that there is a considerable need among foreign investorsfor hedging tools. To enhance its role in risk management andto facilitate investors in carrying out their hedging activities,TAIFEX has introduced a hedge account system. Under the sys-tem, the position limit of a hedge account is limited not by a pre-scribed and predetermined figure, but by the value of its hold-ing in the underlying cash market, hence, enabling their hedging

needs fully satisfied.In addition, in order to

help traders achieve bettercapital efficiency, SPANmargining is now extendedto include end users, and notonly at the clearing memberlevel. Furthermore, tradersmay now deposit securitiesin the form of stocks andbonds as margin. Thesemoves allow traders to postless collateral in the form ofcash, thereby further en-

hancing their capital efficiency. Last but not least, TAIFEX hasrevised the final settlement date for index futures and optionsfrom the day after last trading day, to the last trading day itself,and simplified the method for calculation of the final settlementprices, thereby enabling traders to access their funds on T-day.Going forward, TAIFEX will continue to provide an effi-

cient, safe, and fair marketplace for all participants. Among thenew initiatives to be introduced will be the launch of single-stock futures, and implementation of after-hours trading and ablock trade system. We will be paying especially close attentionto the effective implementation of all new initiatives, andstrengthen the futures market’s hedge function. Our goal is tobuild an efficient, effective and vibrant risk management mar-ket for domestic and overseas users.


Andy YehChairmanTaiwan Futures Exchange(TAIFEX)

Contact: www.taifex.com.tw

“TAIFEX offers a diverserange of products, includinginstruments based onstock indexes, individualstocks, interest rates,and commodities.”

March 1997 Futures Trading Act promulgated

September 1997 Taiwan Futures Exchange (TAIFEX) founded

July 1998 TAIFEX Futures launched

July 1999 Electronic/Finance Sector Index Futures launched

April 2001 Mini-TAIFEX Futures launched

December 2001 TAIFEX Options launched

January 2003 Equity Options launched

June 2003 Taiwan 50 Futures launched

January 2004 10-Year Gov. Bond Futures launched

May 2004 30-Day Commercial Paper Interest Rate Futures launched

March 2006 USD-denominated products launched: Gold Futures, MSCI Taiwan IndexSM

futures and options

October 2007 GreTai Securities Market Stock Index, NonFinance NonElectronics Subindex

Futures and Options launched

SPAN margining system for clearing members

Margin reduction for futures spread trades

Market makers for futures products

Futures calendar spread order functionality

Margin reduction for day trades

January 2008 NT Dollar Gold Futures launched

April 2008 Daily disclosure of trading information on three major financial institutional

investor groups

June 2008 Acceptance of multiple currencies as margin deposits

Adjustment of initial-to-clearing and maintenance-to-clearing margin ratios

October 2008 Increased frequency of intra-day excess margin withdrawals

Institutional hedge account

November 2008 Acceptance of stocks and bonds as margin deposit

Implementation of SPAN margining system to end clients

Final settlement price methodology modified

Final settlement day brought forward for stock index futures and options

December 2008 Implementation of TCP/IP

January 2009 Cash settlement for Stock Options (Jan. 5)

NT Dollar Gold Options launched (Jan. 19)

1H 2009 Single Stock Futures to be launched

2H 2009 Introduction of after-hours trading

Margin financing of customers by FCMs

Establishment of Joint Credit Information Databank of futures market

Focus

11


The Chronology and Milestones of TAIFEX

First5 years

Second5 years

Third5 years

Start-up

Grow

thR

eformation

12

Focus

Given the current circumstances of a financial crisis, the conse-quences of which are suffered on a global scale, the strengthsof the Turkish Derivatives Exchange (TurkDEX) within thecontext of financial turmoil are particularly highlighted. Thatis, the trading volume at TurkDEX continued to grow sharplyeven in times of volatility and uncertainty while it has contin-ued to attract more customers. According to Futures IndustryAssociation (FIA) data, TurkDEX now stands in the 28th placein terms of futures and options traded and/or cleared in 2008.This is significant given thefact that TurkDEX has notyet listed the long awaitedsingle stock futures andoptions which are expectedto further boost the tradingvolume.

Briefly on TurkDEXTurkey has emerged as oneof the main destinations forinternational investors withits rapidly growing financialsystem and a well functioning dynamic market economy.International investors’ share in the Turkish spot equity markethas reached 63%, which is indeed a remarkable share.However, until 2005, Turkish capital markets lacked a deriva-tives market, which is essential for an efficient financial marketenvironment.The Turkish Derivatives Exchange (TurkDEX) was formed

as a self-governing joint stock corporation in 2002 through aresolution of the Cabinet based on the approval of the CapitalMarkets Board (CMB) of Turkey. Trading started on February4th, 2005, right after the authorization of the CMB to operate,as the first and the only derivatives exchange in Turkey.TurkDEX provides a very liquid derivatives market and pres-ents investors with proper tools for managing risks and diver-sifying investments.

TurkDEX strengths within the current financial crisisA fair, transparent and efficient market structure lies at the coreof TurkDEX regulations, which are guaranteed by the regula-tion and audit of the Exchange and its Members by the CMB.As of April 2009, TurkDEX has 87 members all of which areeither certified brokerage firms or banks based in Turkey.Strong capital adequacy rules are enforced by the CMB for bro-kerage firms and by the Banking Regulation & SupervisionAgency for the banks which are TurkDEX members.

With the latest downturnsin the global markets, theneed for risk management hasbeen felt to a great degree.TurkDEX is now better posi-tioned in the overall financialsystem given its sound riskmanagement applications,such as account based pre-trade margining. Unlike mostother exchanges, margins arechecked before order match-ing at TurkDEX. No orders

can be matched in case of insufficient collateral. While the mar-gin levels are adjusted regularly to meet market conditions, thisup-front margining system allows us to constrain the riskstaken by our investors.

A sound clearing houseMoreover, Istanbul Stock Exchange Settlement and CustodyBank Inc. (Takasbank), the central clearing institution inTurkey, operates as the clearing house of TurkDEX. The settle-ment and clearing of transactions are executed on cash settle-ment basis. A guarantee fund was also established with the paid-in capital of the clearing members, which is used in case a mem-ber defaults. The clearing members must contribute to theGuarantee Fund with cash and non-cash collaterals. The fixedamount of collateral contribution is determined by the member-ship type while the variable collateral amount is dependent onthe nominal value of the open positions held by the member.


Turkish DerivativesExchange withinthe global financialsystem under scrutinyAt a time of financial turmoil on a global scale, market participants are going through testing times. The cur-

rent crisis stems to a large extent from counterparty risk management failure that has magnified the impor-

tance of regulatory mechanisms and legal enforcements as safeguards of risk management practices. The

recent turbulence demonstrated that risks could be mismanaged or even turned a blind eye on under conditions

of lax regulatory oversight. Accordingly, the global crisis highlighted the importance of exchanges as mecha-

nisms for the elimination of counterparty trading risk, for transparency, disclosure and integrity.

“A more functional tradingplatform will enablelisting of a more diversifiedrange of products.”


A stable electronic trading platformTurkDEX futures are traded on an electronic trading platform(TurkDEX Electronic Operating System-TEOS), which wasalmost 100 percent available during last year. TEOS allowsmembers to monitor their positions through client software.We are currently in the process of making necessary invest-ments to adopt a new trading platform in order to improve thefunctionality of the current trading system. It should howeverbe emphasized that at the heart of adopting a new trading plat-form is ensuring that the safety and efficiency of the currentsystem remains intact. The new trading platform will allowTurkDEX to list a more diversified range of products. In addi-tion, the give-up functionality will soon be available that hasespecially been demanded by international investors.

No barriers to entryIt should also be noted that there are no regulatory restrictionsfor international investors to trade at TurkDEX. For instance,position limits are imposed on account basis regardless of theinvestor type. Tax advantages are available for non-residentinvestors who are exempt from withholding tax on gainsresulting from transactions on TurkDEX. In 2007, internation-al investors accounted for 25 percent of the trading volume atTurkDEX, which was followed by 23 percent in 2008. It ishowever noteworthy that the majority of open positions atTurkDEX are held by international investors. TurkDEX hasrecently applied to the Commodity Futures Trading Com-mission for a No-Action Request for ISE-30 index contracts.

Prospects for growth: the introduction of new productsTurkDEX currently operates for a core product base of cur-rency, interest rate, equity index and commodity futures. Thetrading volume at TurkDEX indicates that there has clearlybeen a need for these new financial instruments within theTurkish financial system. TurkDEX notional trading volumein 2007 increased by 6.6 times, exceeding 92 billion US dol-lars. In 2008, the trading volume reached 162 billion USdollars.Until 2009, the trading volume breakdown at TurkDEX was

mostly concentrated in equity index futures, which accountedfor 91 percent of the notional trading volume in 2008. With theISE-30 index futures, investors gain exposure to 30 equities.The ISE-30 index future is the most liquid financial instrumentwithin the overall financial system in Turkey. In the first quar-ter of 2009, currency futures surged up to 19 percent due to anincreased demand for hedging. The share of currency futures inMarch 2009 was recorded as 24 percent.TurkDEX is determined to design and launch new products

in order to better address the needs of investors in terms of risk

transfer, price discovery and dynamic hedging, which have allgained more importance in the recent era. The new instrumentsthat TurkDEX is planning to introduce include single stockfutures, options, contracts for difference (CFDs) and interestrate futures.Another issue that has been under scrutiny due to high mar-

ket volatility has been the utility of the market cap-weightedindex futures for hedging purposes. In order to strengthen thehedging mechanism provided to investors, TurkDEX intends tolaunch single stock futures once the legal approval for listing isreceived from CMB. The new surveillance system that is in usewill also enable efficient monitoring of the upcoming singlestock futures.With the adoption of a new trading platform, options are to

be introduced at TurkDEX. It is our belief that the trading vol-ume will soar with the introduction of single stock futures andoptions. The market maker system has also been introducedrecently in commodity contracts, i.e. cotton and Gold Futures,to enhance liquidity.Given our strong regulatory mechanisms, sound risk man-

agement and a reliable clearing house, which all ensure safety,transparency and efficiency of trades, TurkDEX has providedand shall continue to provide a safe harbor to its investors dur-ing times of volatility and uncertainty. Moreover, a more func-tional trading platform will enable listing of a more diversifiedrange of products that will offer investors tools not only forrisk management in terms of dynamic hedging and risk trans-fer but also for investing in one of the most dynamic and prom-ising financial markets at the crossroads of Europe, Asia andthe Middle East.

Focus

13

Yaman Basaran is Deputy ChiefExecutive Officer of Turkish Deri-vatives Exchange.Internet: www.turkdex.org.tr


Today trading spans all time zones as markets have migrated toelectronic platforms with increasingly global participation. Theability to connect buyers and sellers has never been easier orcheaper. And yet, in the face of growing global demand for pro-tein, historically low stocks and biofuel as a new source of con-sumption, African and other developing market nations lingeroutside the mainstream of global trade. Bridging the gapbetween the global trading community, commercial buyers indeveloped markets and producers in these developingeconomies suggests significant savings in marketing costs aswell as improved producer profitability, enabling investmentand productivity increases. This has great importance for glob-al food availability, and holds great opportunity for commer-cial buyers, traders and those who create and operate emergingmarket commodity exchanges.Let’s take a closer look at the workings of this basically very

simple tool that could alleviate a lot of problems in many mar-kets.

The role of trust in a marketplaceA fundamental requirement of a successful market is the percep-tion of trustworthiness among its users. Users must have faith in(inter alia) the eventual convergence of the cash price and expir-ing futures contract price; in the clearing and settlement mecha-nisms to ensure financial performance to the contracts includinggood delivery; and the enforceability of the contracts themselvesunder the laws of the prevailing jurisdiction. The combination ofuncertainty in the clearinghouse’s ability to ensure deliveryaccording to contract standards and specifications, and the lackof legal precedence or clarity should a party need to seek legalremedy for contract non-performance continues to keep would-be participants out of emerging markets. Any informal survey ofphysical grain traders regarding emerging market contracts is

bound to elicit comments akin to “not worth the paper it is writ-ten on”, “years in the courts”, “home field advantage” and soon. Trust remains a barrier to the entry of traders and commer-cials to the exchanges in emerging markets.

How warehouse receipts can supplement trustin an emerging market exchangeHow is it that an instrument employed as loan collateral in theUnited States as early as the 1890s could be an emerging mar-ket innovation?Andrea Corcoran (former division head at the CFTC and

Chair of the IOSCO committee that developed an assessmentmethodology for benchmarking “principles” designed toimprove international regulatory standards) wrote: “Markets –through their rulemaking powers – have the means to tran-scend or improve upon national law. (…) This is true notwith-standing a diversity of, or even diminished, legal and regulato-ry infrastructures in some of the jurisdictions where marketcounterparties are located. (…) As such, exchange rules poten-tially can overcome uncertainties – not the least of which arenon-existent, conflicting or inadequate laws.”2

A legitimate warehouse receipt can be improved upon withan insurance policy for which the bearer of the warehousereceipt is the direct beneficiary should presentation of thereceipt not result in good delivery of the quantity and qualitydescribed thereupon. For policies issued by well-known andtrusted insurance companies, under a trusted jurisdiction –which need not be the country in which the warehouse is locat-ed –, the holder of the receipt can file a claim against the insur-ance policy, with resolution generally taking two to four weeks.An emerging market commodity exchange employing this solu-tion for physical delivery has an important and valuable com-petitive differentiator.

14

Focus

Warehouse receipts:Bridging the gapbetween global tradersand emerging marketsIn her moving and uplifting TED presentation1 in June of 2007, Eleni Gabre-Madhin shared some fundamental

insights into the inefficiencies of grain marketing in rural Africa. Among them was the fact that commodity

actors transact in small circles, in a network of people they know; and that when grain changes hands – as it

does 4 to 5 times as it moves from producer to consumer – it also changes sacks. It changes sacks because

visual inspection is the only way traders know the quality of the grain they’re getting. The greatest innovation

of the Chicago Board of Trade, she goes on to suggest, was the creation of standards and warehouse receipts

which alleviated the need for visual inspection, and permitted trade across wide distances and into the future.


1 Eleni Gabre-Madhin, “Building a commodities market in Ethiopia”,www.ted.com.

2 Andrea Corcoran, “The uses of new capital markets: electronic commerceand the rules of the game in an international marketplace”, AmericanUniversity Law Review Vol: 49, 2000: 585-586.

One caveat is that insurance may take a number of formsand contain some arcane terms that significantly impact thespecific protection. For example, “all risks” cargo cover overthe goods themselves is quite different from insurance coveringcontract frustration. Credit Support Agencies, such as Audit,Control & Expertise, based in Geneva, have risk mitigationstrategies and services to ensure proper coverage. This is a sig-nificant and meaningful improvement for would-be users ofemerging markets.

History of warehouse receiptsThe use of warehouse receipts for executing the business of afutures exchange was one of the earliest innovations of theChicago markets, quickly leading to warehouse receipts as thede facto currency of agriculture, and enabling farmers to nego-tiate the sale of their crop, and transfer title with ease and con-fidence. By the 1890s, US firms were borrowing and lending onreceipts against commodities held in both public and privatewarehouses. In 1916, warehouse receipts became even moreuseful. The Warehouse Act was a ‘permissive regulator’ act:Certification of warehouses and warehouse operators was vol-untary, but once certified, rule compliance and regulator over-sight were both mandatory. The benefits included:• A federally recognized and enforceable contract betweenwarehouse operators and farmers with terms and conditionsthat were acceptable to bankers (contract standardizationnot unlike the benefits of ISDA master agreements);

• Lower borrowing rates to farmers because of the enhancedintegrity of the warehouse receipt (lower risk to lenders dueto the certainty of the existence and condition of the pledgedcollateral);

• Sound warehousing practices due to rule enforcement andunannounced inspections;

• Greater protection against loss and damage as well as moreflexibility with regard to when producers could sell theircommodity (as opposed to harvest time when prices wereseasonally lowest);

• Uniformity that enabled warehouse operators and theAmerican agriculture industry to compete in a global envi-ronment.

In 1993, an amendment to The Warehouse Act permitted thecotton industry to use electronic warehouse receipts. Electronicwarehouse receipts cannot be duplicated or forged, and loss ordamage to the document is no longer a risk as they are held ina central repository. Clerical issues such as assignment of par-tial amounts no longer require canceling and re-issuing docu-ments. These new electronic controls and ease of authentica-tion and transfer greatly reduce the risk of fraud, lower the

time and cost of transfer and enhance the trustworthiness ofthe system.

About warehouse receipts

A warehouse receipt is a physical document (or increasingly an

electronic record) that represents a described commodity

(weight, grade or quality, and location) issued by a duly empow-

ered agent (such as a Warehouse Manager or Collateral

Manager) in control of the warehouse where the goods are in

storage. To be of practical value, receipts ought to be nego-

tiable (able to be sold or transferred to another party as a form

of payment or delivery); the issuer must be bonded, guaran-

teed, insured or otherwise capable of making financial restora-

tion should the goods under its care sustain damage or loss;

and the grading and warehousing must be performed profes-

sionally and in compliance with best practices or laws.

Warehouses that store goods against which a receipt may be

issued must be certified by an exchange or exchange-approved

regulator. This assures professional operation (financial where-

withal, audited books and records, and prevention of commin-

gling with untested commodities, or other loss or damage to

commodities under store) and ultimately trust and acceptance

by the market place. Special attention needs to be given to the

grading of the commodity, to ensure uniformity and compliance

with the grade description. This must either be done by the

exchange itself or by an approved grading agent. The market

place must find the quality assessment and weight represent-

ed on the warehouse receipt to be reliable for delivery to off-

takers.

Legal definitions vary by jurisdiction. While use of the term in

the United States is consistent with an instrument for confer-

ring an unencumbered title to the described goods, English Law

distinguishes between ownership and pledges. Warehouse

receipts may be used as evidence of rights of possession under

English Law, but a bank would need to take a pledge over the

goods themselves, not on a warehouse receipt. Ownership may

be unattractive to a lender, as it may entail responsibilities and

costs. Local laws may further make ownership unattractive, as

there may be prohibitions against foreign entities owning or

exporting commodities, taxation implications and whatnot.

Other instruments of title (such as bills of lading) and pledge

(such as trust receipts) may be used to complete the similar

objective of securing collateral and transferring ownership.

Focus

15


Worth WatchingMany still nascent markets have the potential to become vitalcenters for global commodity production and trade. Thedeployment by exchanges and adoption of warehouse receiptsas collateral by western banks, may be an important early indi-cator of an emerging success story. Here a sampling of a fewinitiatives that are currently under way:

Dubai Multi Commodities CentreThe Dubai Commodity Receipt (winner of the 2007 TradeFinance Deal of the Year Award3 from Euromoney’s TradeFinance Magazine) has been expanded to become the GlobalMulti Commodities Receipt, with International CommodityReceipts available for locations in Singapore, Malaysia, SouthKorea and plans for expansion into Europe and NorthAmerica. This could be the model for cross-border deliveryagainst exchange contracts.

Basel II Banking AccordWarehouse receipts have been recognized as risk mitigants thatreduce the capital set-aside required for lending banks. Thosebanks opting for the “Internal Rating Based Advanced”approach will be able to finance trade and commodities collat-eralized with warehouse receipts on more attractive terms with-out jeopardizing their risk-adjusted return on capital.

African Implementation• ICX, the system provider to ESC (the widely adopted SouthAfrican electronic warehouse receipt system manager), isproviding their technology and know-how to UCE, thestart-up Ugandan Commodities Exchange.

• There have been recent attempts to create a warehousereceipt manager in Zambia, beginning with ZACA(Zambian Agricultural Commodity Agency), an independ-ent warehouse oversight co-operative which found the valueproposition of warehouse receipts was very difficult to com-municate without a price dissemination platform. ZAMACE(Zambian Agricultural Commodity Exchange) was subse-quently created and is in the process of certifying a networkof warehouses across the main agricultural districts. Theyhave developed standards for wheat, maize, soya and sun-flower which are now widely accepted by the agriculturaland commodities industry in Zambia.

• ACE (Agricultural Commodity Exchange for Africa, locatedin Lilongwe, Malawi), a pioneer of agricultural markets inAfrica, has embraced the importance of contract enforce-

ment and timely resolution. Having trained arbitrators inMalawi, Zambia, South Africa and Zimbabwe, and madearbitration the mandated means of dispute resolution, not asingle dispute occurred with regards to warehouse receipts.

The traction these initiatives gain should give an indication asto whether local producers understand the value of warehousereceipts as loan collateral and delivery vehicles for marketingvia exchange.

Indemnity FundsActing much like clearinghouses, indemnity funds are formedto remedy failure or default on delivery associated with a certi-fied warehouse receipt. Several Eastern European countries(Bulgaria, Hungary, Kazakhstan, Poland and others) afterenacting legislation to enshrine warehouse receipts in law, haveassembled indemnity funds from contributions made by theparticipating warehouse operators, governments and interna-tional development banks.

ConclusionClearly visual inspection is a non-starter for commercial buyersand global traders, and just as clearly, standards and ware-house receipts are a gross oversimplification of the challengesfacing those who are promoting new exchanges in emergingmarkets. However, with regards to trust in delivery, and timelyfinancial remedy that is not dependent upon an emerging mar-ket court system, insured electronic warehouse receipts, andassociated innovations, are a significant improvement on thepre-existing emerging exchange value proposition.

16

Focus


Chip Dempsey is an independentconsultant with expertise inexchange and clearinghouselaunches, post-trade supply chainintegration and a wealth of experi-ence in emerging markets. Prior toconsulting, Chip was the SeniorVice President for Sales & Strategy

at each of: The Clearing Corporation, CQG, andSunGard Futures Systems. He began his career as anoptions market-maker on the floor of the CBOT, andtraded interbank FX at Chemical Bank (now JP Morgan).His article “The Future of Clearing” was publishedby the United Nations Conference on Trade andDevelopment. Chip lives in Boulder, Colorado with hiswife and three children.

3 See www.dmcc.ae

Derivatives andemerging markets –a polemic basedin Russian experienceCommon wisdom would have it that the big derivatives disasters of the financial crisis happened with CDOs,

swaps and products issued by the likes of Lehman, that is, in the major financial capitals. Still, it was through

derivatives contracts that some of the crisis arrived in Russia. For instance, the global market has intervened

through derivatives into the attempt of the Russian elite to insulate Russia from the global markets.

18

Focus

In particular repos have become a tool for wealth redistribu-tion: In pre-crisis times, they allowed a seemingly worldwideand unstoppable expansion of major Russian oligarchs andcorporations. Nowadays, they can be counted as being respon-sible for the loss of many shareholdings in international com-panies, for the continued pressure on shareholdings in Russiancompanies as well as on the Russian state, in its willingness tokeep some of the major corporations in Russian hands.When Russian companies were close to being handed over,

in a first phase, the state hascome up with the cashrequired by margin calls, orregulations have been tight-ened to avoid a change ofcontrol. For example, thestate’s extension of a loan toAlfa Bank in autumn 2008played a major role in thatcompany fending off a repo ofits shares in Vimpelcom, andin its subsequent attempt totake possession of the lender’sshare. Now, it is clear thatsuch direct intervention is unlikely to be repeated for sheer lackof funds, and restructuring efforts are quickly becoming moresophisticated.Actually, a shortfall in the use of derivative instruments may

be seen as the cause of the partial decrease in lending andapplied financial engineering accompanying the deleveragingthat we are currently witnessing. This deleveraging is heavier inthe emerging markets than elsewhere. In sophisticated markets,there are instruments to contain the effect of comparativelystraightforward risks, such as fluctuations in currencies andinterest rates. In addition, risk management will help develop-ing alternative strategies to react to external shocks.Accordingly, one would have expected that the focus of leg-

islators and market participants would be to make sure thatderivatives are used in the context of long term strategies andtheir focus indeed is on hedging risks, in other words, that cor-porate governance is strengthened alongside rules for introduc-ing more diverse forms of derivatives and financial engineering.Russian legislators, however, seem not only to focus on solving

problems when they arise, but indeed solving problems that donot really exist.The current discussion on the reform of the Russian Civil

Code fails to address derivatives issues. Similarly, the new lawon limited liability companies does not adopt a differentapproach to corporate governance issues and rather repeats theexisting formalistic criteria for seeking corporate approvalswhich have negatively affected the practice in the past. New leg-islation on pledges, while addressing capital markets transac-

tions, does not deal with reposand introduces a partial priori-ty for employees’ claims overclaims secured by a pledge thatwill certainly not be favorablyviewed by markets. New legis-lation on trading foreign secu-rities in Russia seems to sur-prisingly limit the use of deriv-ative instruments by nonRussians to qualified investorsand be more formalistic thanthe regulations that were inplace before. New legislation

on bankruptcy is not clear on offsetting and netting, but is like-ly to lead to an increase of the period in which every act witheffect towards the debtor can be reviewed to three years at thesame time at which legislation allowing netting is pending.The exchanges, which were at the center of plans for regu-

latory reform and supposed to support the efforts to increasethe attractiveness of Russian capital markets, have experiencedsevere setbacks through defaults of market participants andthrough closures to give the state time to react to market devel-opments, the defaults on corporate bonds and the consequen-tial uncovering of their structural defects. Except for the simplerule that derivatives can be enforced, Russian law relating toderivatives has not made any progress, and Russian practicehas not developed much more than a standard derivatives con-tract of doubtful practicality.Big plans for Moscow as a financial center continue to be

discussed, although the crisis has clearly shown that not eventhe governments and financial institutions of established mar-kets would typically have the know-how required to create a


“Except for the simple rulethat derivatives can beenforced, Russian lawrelating to derivatives hasnot made any progress.”

sustainable legal framework, and it shouldn’t have taken theexamples of Iceland and Latvia, where the build-up of financialinstitutions with international reach has wound up costing thetaxpayer dearly, to show the risk involved.Financial institutions, whether local or global, would not

have risked much to develop markets that are not core to theirbusiness even before the crisis, and the increase in transparen-cy likely to be a consequence of the crisis – not least the regu-lation of bonus structures – is likely to further discourage insti-tutions from investing in the long term development of marketsas opposed to stabilizing their businesses in the medium term.Accordingly, it would be difficult to give a single example of thesuccessfully planned development of financial instruments(such as stock exchanges or the ruble pricing for commodities)or reforms (see the capital markets based pension system or theattempts to introduce securitization legislation), let alone themany initiatives necessary to create financial centers.From an emerging markets perspective, it is as easy to see

what would be required for a wiser use of financial products asit is to understand that this is quite unlikely to happen. Forfinancing of CIS companies to become more stable it would benecessary that risk assessment deals in depth with the specificsof the emerging market – on the lender’s side too – and thecompany forcing lenders to take prices adequate for managingthe related risk. None of the existing reform proposals for rat-ings and rating agencies inspires confidence that any progressin this direction be achieved. Regulated lenders seem to be gen-erally burdened with capital adequacy requirements, and arenot enticed to come up with long term specific risk assessmentmethodology. On the basis of any of the reform proposals, rat-ing agencies are not likely to better assess the specifics ofemerging markets and their macroeconomic exposure in thefuture. The easy solution, regulating rating agencies with aview to making them more reliable, does not only illogicallypresuppose that increased regulation would increase quality ofthe risk assessment, but also simply neglects the general need ina global world to broaden instruments for independent riskassessment. Hedge funds are likely to continue to advertisetheir short time advantages over traditional investments andkeep silent about the medium and long term risks.The effect of the lack of adequate reform is not likely to

become visible soon in any crises specific to Russia, but thefinancing available to emerging markets will continue to beinterlinked with growth or the lack thereof in established mar-kets. Not only are German car manufacturers strugglingbecause of the drop in exports, but machine suppliers are aswell. It is difficult to conceptualize how the world would looklike if reforms had progressed in an optimal manner, as typi-cally developments are measured against the past.

As a purely academic illustration, however, if reforms hadstarted with building up lending know-how, such know-howcould now be used to disburse the substantial state funds andwould positively affect the order books of Western manufac-turers and banks. The role sophisticated financial instrumentscould play in the transformation economies can be illustratedwith an example taken seemingly far from financial markets:Throughout the CIS, housing prices fluctuate with apartmentsin boom times being more expensive than in comparable citiesanywhere else in the world. Those prices are the first to fall atthe outset of a crisis. At the same time, housing is generally notonly unsophisticated, but also energy-inefficient. This isbecause a large part of the population, particularly pensioners,keep the apartments they received during privatization withoutbeing able to finance any investment. A program to increaseapartment leasing, coupled with lifetime living rights andallowing for the lender to take ownership in the house later oncould change the situation radically. It would however besophisticated and require the use of substituted internal riskmanagement systems as well as derivatives.This is a sobering analysis, but on the other hand shows the

development potential and importance of the macro benefitsthe appropriate use of derivatives could have.

Focus

19


Dr. Max Gutbrod is Partner atthe Moscow office of Baker &McKenzie – CIS, Limited. He spe-cialises in corporate and commer-cial law, joint ventures, restructur-ings as well as legislatory issues.He also advises clients in bankingand finance, natural resources andIT/Telecommunications matters.

Dr. Gutbrod frequently publishes on Russian and interna-tional law and is a regular expert for Russian authoritiesas well as International Organisations.



Romania: A new presenceon the derivatives mapIn order to understand the context regarding the region, we dare to say from the very beginning that Romania

seems to be an important player in this part of Europe, considering it at least as an emerging market. This is

possible due to the potential and inherent characteristics of Romania, which are straightforward to find out,

writes Septimiu Stoica, President of the Romanian Commodities Exchange.

20

Focus

Institutional framework – General overviewRegarding the capital market, Romania has developed a com-plete institutional infrastructure and has already accumulatedan important experience and expertise concerning this activity.

Within the capital market, the four classical levels are alreadyfunctioning:• buy side• sell side• infrastructure institutions• regulator

Among market institutions, the following exchanges are func-tional:• Bucharest Stock Exchange (BVB)• Sibiu Monetary, Financial and Commodities Exchange(SIBEX)

• Romanian CommoditiesExchange (BRM)

• OPCOM, the electricpower market

In addition, there are alterna-tive trading system projectspending authorization. One ofthem, the APOLLO-X system,has been initiated by a localinvestment company.

From the point of view offinancial instruments tradedon the market, spot products (shares, bonds, rights, commodi-ties) rank first. Recently, especially because of to SIBEX’ activ-ities, derivative products are beginning to capture both publicand investor attention.

Derivative milestones in RomaniaThe interest for developing derivative products in Romaniaarose in the 1990s: In 1994 and 1995, BRM prepared the trad-ing and clearing rules for these products and drafted the proj-ects for two futures contracts, trying to mobilize the banks’interest in trading them. But at that moment no transactionswere concluded.The first operations with derivative products were actually

performed by SIBEX in 1997, acting at that moment as a com-modity exchange. Two other commodity exchanges tried tokeep up: one in Bucharest (its second attempt) and one fromConstanta. BRM soon gave up, while the Constanta exchangeended up being closed.

As a result, SIBEX was the only derivatives market in thecountry for some time. It adopted an intelligent policy of pro-moting their financial products, attempting to attract brokersfrom the capital market as members.After 2004 BVB tried in turn to develop derivative products.

The intention turned into a merger project with SIBEX, at therequest of those brokers that were members of both BVB andSIBEX. The merger failed in 2006, and in 2007 BVB finallylaunched its own derivatives market. Unfortunately, recordingvery small trading volumes, it cannot yet be regarded as a realcompetitor for SIBEX.Recently, BRM announced its third tentative on the deriva-

tive products market, promoting in partnership derivativesproducts on commodities. Meanwhile, the alternative tradingsystem APOLLO-X has claimed interest for exotic derivativesproducts, and OPCOM intends to extend its area of tradedproducts by launching derivatives on electricity. As a result,

there are three potential mar-kets for derivatives products,beside the two that are alreadyin place.

The present situation ofthe derivative marketPlans and intentions aside, twoderivatives exchanges are func-tioning in Romania today:SIBEX and BVB. Each of themuses its own integrated centralcounterparty: the Romanian

Clearing House (CRC) for SIBEX and the Bucharest ClearingHouse (CCB) for BVB.Market participants are mainly the same and, as will be

shown, the same can be argued regarding the products. Thesetwo exchanges are now competing in attracting market makerson their markets, especially banks focused on currency prod-ucts.

Classification of the traded derivative productsThe main assets for futures contracts are the following:a) Stocks – the most liquid ones are traded on BVB’s market(15 and 10 types of contracts at SIBEX and BVB respec-tively)

b) Indexes of the BVB spot market (two types of contracts eachat SIBEX and BVB)

c) Interest rate (one type of contract at SIBEX)d) Currencies (five types of contracts at SIBEX and two atBVB)

e) Precious metals (one type of contract at SIBEX)

“In Romania, derivativeproducts are beginningto capture both public andinvestor attention.”


The characteristics of the contracts are classic. The maturityperiod is one to six months, usually, with four maturities year-ly. The settlement is in cash. Options on futures contracts havebeen traded till now only on SIBEX. Plans are addressing newclasses of underlying assets, especially in the commodities area(electricity, CO2 emission certificates, oil products, cereals) andregarding indexes of exchanges abroad. There are also inten-tions to extend the options contracts, but SIBEX’ experienceshows little interest.

Some statistical dataThe most important statistics come from the evolution of theSIBEX market. In 1997, the starting year of its derivatives mar-ket, the Sibiu exchange recorded almost 78,000 contracts. In2002, the exchange concluded almost 300,000 contracts and in2005 more than 700,000. In 2006, it scored a maximum ofalmost 4,300,000 contracts. The years 2007 and 2008 werealso very good for SIBEX, with values of 3,500,000 contractsin average, while in 2009, in the context of the crisis, it record-ed lower trading figures. Waiting for good news, in March2009 a 47 percent increase of the turnover in comparison withthe previous month was announced.After a year and a half of activity on the derivatives market,

BVB has not yet achieved spectacular trading volumes and isstill searching for solutions to establish itself as an importantplayer in this specific local industry.

What to expect from the future?Let’s face it: the Romanian derivatives market relies mainly onthe enthusiasm of its initiators, with their excitement, numer-ous initiatives and statements. The trading volumes are stilllow, as is the number of underlying assets. Among them, basedon SIBEX experience, only three achieve a notable liquidity(two shares of large investment funds and the contract Euro-RON, the national currency). The number of investors is alsolow, ranging in the thousands. The investment funds and bankswere not attracted into the market. The operations are mostlyspeculative, consisting especially in arbitrage between spot andfutures prices. The big operators of the real economy are notyet present on the market and do not manage their risks byusing hedging operations.More than anything, the market is fragmented. The merger

attempt between BVB and SIBEX has failed, as mentionedabove. New initiatives appeared to enlarge the circle: BRMagain (on commodities), later OPCOM (on electric power) andthe new MTF, APOLLO-X, pending authorization. A real insti-tutional exuberance!But there is also reason for optimism. New contracts are

being prepared; market makers are announced in the market-

place in an attempt to improve liquidity and to increase thenumber of trades. Public presentations and training programsare to be launched, and an international opening approach isinitiated. New and performing trading systems will belaunched. For example, SIBEX will soon offer its members thewell known and appreciated platform “Global Vision”, devel-oped by Trayport.Some brokers hope that the merger between the two main

exchanges will finally happen, or at least encouraging partner-ships occur. If not, maybe intelligent and creative competitionwill generate favorable results. Romania has resources and ifthe excitement for the capital market and for the exchangetrade remains at the same level, we will soon be able to replacethe scary inscription found on old European maps describingthe Carpathian territory and its inhabitants: hic sunt leones(Warning, great unknown danger!) with the more encouraging:hic sunt derivates (meaning: Come, excellent capital marketproducts can be found here!).

Focus

21

Septimiu Stoica is President of theRomanian Commodities Exchange(BRM) and former President of theBucharest Stock Exchange and theRasdaq Stock Exchange as well asthe BVB Corporate GovernanceInstitute. He was also VicePresident of the Romanian Brokers

Association. With a PhD in Economics and a Master’sdegree in EU Legislation and Philosophy, Septimiu Stoicais an attorney at law, broker, financial consultant, andprofessor as well as a scientific researcher in ComputerTechnique.



22

Focus

The election of President Obama has had a profound effect onexpectations as to the speed and scale of carbon market devel-opment. The new President not only made climate change legis-lation a major focus of his first one hundred days, he has linkedit to the fundamental issues of economic recovery, energy secu-rity and financing the federal budget. The impact of this inte-grated approach has been to galvanise the US Congress to actwith unaccustomed speed and draft legislation has been deliv-ered as promised by key committee chairmen by the end of May.This was in part possible because of the long gestation anddebate which occurred in Congress during the Bush Admin-istration which, however frustrating the delay, allowed much ofthe positioning by various stakeholders to take place and muchof the uncertainty as to the rightdirection to take to be dealt with.The decision of the Ad-

ministration to back a nationalcap-and-trade approach to re-ducing greenhouse emissions,including an economy wideapproach and auctioning, hasaccelerated the interest of boththe investment community andintermediaries in carbon mar-kets. The effect outside the US isequally significant. It has shiftedthe expectations of a deal on apost-Kyoto treaty from negative to positive and has givenadded impetus to the introduction of national emissions trad-ing schemes around the world. Legislation or consultation onlegislation for such schemes is moving forward in almost everymajor economy including China, Japan, Australia, NewZealand, India, Brazil, South Africa, South Korea and Canada.The European Union is reaching out to the US to link the mar-kets to accelerate the development of a global carbon marketand linkages between the US and Mexico and betweenAustralia and New Zealand are being actively pursued.Many of these initiatives were already moving forward as a

result of domestic political and environmental concerns, butthe increased likelihood of a global deal has intensified thatprocess. The reason is obvious: if a country is going to take ona treaty obligation to reduce its emissions the best way of con-trolling the allocation of the costs of compliance and the levelof those costs is through a scheme that is under domestic polit-ical control and designed to accommodate domestic economicconditions. Those countries which are part of the treaty butwhich do not or cannot create a domestic market will have todeal directly with whatever international regulatory mecha-nism is put in place.

The history of international regulation to date is not a happyone. The two “flexible” mechanisms of the Kyoto treaty, JointImplementation (JI; investment between developed countries)and the Clean Development Mechanism (CDM; investmentbetween developed and developing countries) have had onlylimited success. There are virtually no JI projects and the CDMprojects have not only been the subject of criticism as to theireffectiveness, the regulatory body, the Executive Board of theCDM, has proved itself unable to cope with the complexity andscale of the undertaking it assumed. Put simply, it undertookthe responsibility to review, approve, certify and verify everyclimate mitigation project in the entire developing world. Nohuman agency on earth can accomplish that task and it is small

wonder that there is a hugebacklog of projects many ofwhich are unlikely to be pur-sued given the regulatorycosts and delays (now mea-sured in years) of obtainingCDM approval.The European emissions

trading scheme (EUETS) hasdeveloped meaningful vol-umes but at huge cost tointermediaries and investorsalike. The scheme has beendiscredited repeatedly as a

result of repeated political interference in its operation. InPhase 1 of its operation the price of credits started at h7 wasdriven up to h30 as a result of misinformation as to the num-ber of permits issued and misleading data as to actual indus-trial emissions, only to collapse to virtually no value as bank-ing of credits into Phase 2 was banned. The recent review ofPhase 2 has, in an effort to avoid the problems of Phase 1,concluded that what is needed are further restrictions onimporting CDM credits, and the gradual introduction of auc-tioning as opposed to allocations based on political pressure.This ran into the maelstrom not only of the current econom-ic crisis but the refusal of such countries as Germany andPoland to accept a comparatively high carbon price. Free per-mits were allocated and emissions are down due to the reces-sion so the price has again dropped to the point where aninvestment is unjustified except where government subsidiesare available.This is not to say that nothing has been learned. On the con-

trary many lessons have been including the need of markets fortransparency, predictability and integrity. Carbon is an unusu-al thing to trade. It has aspects of a commodity (its increase ordecrease is physically measurable) and of a financial instrument

Carbon marketsin transitionVarious initiatives launched after the election of President Obama have added considerable momentum to the

development of carbon markets, shifting the expectations of a deal on a post-Kyoto treaty from negative to pos-

itive, and giving added impetus to the introduction of national emissions trading schemes around the world,

writes Eric C. Bettelheim.

“The increased likelihoodof a global deal hasintensified legislativeprocesses in almost everymajor economy.”


(physical delivery is impossible). Most of all it does not have anatural scarcity value; indeed the problem we face is over-abundance. Its value is created by laws and regulation impos-ing limits and costs on its emission and hence ultimately itsprice is sensitive to political decisions. Reducing the risk ofpolitical interference is critical to the market’s success as is theestablishment of regulatory frameworks which are predictable

and low-cost. Long term targets must be set and the rules of thegame must be firmly established before markets can performtheir functions of price discovery, risk transfer and guide toinvestment.The temptation to politicians to interfere is driven, ulti-

mately by the high stakes involved. The competitiveness of theentire economy is at stake in industrialised and rapidly indus-trialising countries. For developing countries huge potentialcapital flows in the form of inward investment and their ulti-mate rate of economic growth are at stake. At its core the inter-national discussions on greenhouse gases are in reality a globaltrade negotiation involving everything from tropical forests totechnology transfer.The investment required to alter the current “business as

usual” track to one which limits the risk of catastrophic climatechange is measured in the tens of trillions of dollars over thenext several decades. Nymex estimates that the US traded mar-ket alone will be a trillion dollars. McKinsey estimates thatannual transfers to the developing world, where mitigation ischeapest, will grow rapidly to over 100 billion Euros.With stakes that high it is easy to understand the wish to

control the price of carbon and who will bear the costs andwho is likely to benefit. Proposals in the US and elsewhere forcaps and floors on the price, for new special purpose institu-tions, separate from the established market regulators, to haveresponsibility for market oversight and relations between mar-kets abound as a result. Almost all of these proposals, how-ever understandable, include a level of political and regulatoryintervention which is unusual and something to which marketparticipants will have to adapt. The impetus toward carbonmarket development is now irresistible but unless politiciansexercise restraint they will jeopardise the very benefits, partic-ularly lowering the cost of meeting emissions reductions goals,which market mechanisms offer.

Focus

23

Eric C. Bettelheim is Chairman ofSustainable Forestry ManagementLimited. Established in 1999,Sustainable Forestry ManagementLtd is specialising in the sequestra-tion of carbon through reforesta-tion.

Carbon Market Growth

(1) Source: World Bank & IETA, May 2005 (4) Source: Point Carbon(2) Source: World Bank & IETA, May 2007 (5) Source: The Economist(3) Source: IETA (6) Source: Point Carbon

1997–2004 2005 2006 2007 2008 Est 2012 Est 2020

$780 million(1)$11 billion(2)

$30 billion(2)

$60 billion(3)

$118 billion(4)

$1,000 billion(5)

$3,000 billion(6)


24

Focus

According to industry analyst Celent, thecarbon exchange market grew from lessthan EUR 9 billion in 2005 to aboutEUR 25 billion in 2007. Annual transac-tion value could reach EUR 40 billion by2012 and climb to over EUR 100 billionby 2020, depending on the future regula-tory framework. Most of the activity inthis market is centred in Europe, withelectricity generators as the main partici-pants. Setting an emission cap and allow-ing firms to trade their emissionallowances, an approach called “cap-and-trade”, provides the best of bothworlds: flexibility to find the emissionreductions with the lowest cost, whileproviding incentives to reach emissiontargets. Cap-and-trade has been shownto provide at least 40 percent cost sav-ings compared with a command-and-control regime. However, some chal-lenges need to be addressed.Areas where improvements need to be

made to the carbon market include:• reducing market fragmentation• avoiding over-allocation of quotas• eliminating different product stan-dards

• reducing barriers to entry• improving market surveillance• improving information and trans-parency

• creating certainty over inclusion ofnew sectors and the future of theKyoto framework

Based on global carbon market irregular-ities and their experience of the EU’semission trading scheme (ETS) market,Nord Pool and NASDAQ OMXCommodities have identified some prin-ciples critical to the functioning of localand global carbon trading.• A large number of buyers and sellersprovide reliable pricing and create liq-uidity

• Standardised (homogeneous) prod-ucts link markets globally

• Low barriers to trading: reducing

credit risk and transaction costs allowmore players to enter the market

• Perfect information on prices, vol-umes, emissions and regulationsreduces risk

• A predictable long-term frameworkprovides a stable investment environ-ment

• Wide sector coverage• Borrowing and banking of allowances• Increased use of auctioning and link-ing to carbon credits and other trad-ing schemes

Improving carbon marketsThe two companies believe that marketfunctionality will be improved in thefuture by auctioning quotas and frequentemission reporting. This will increase liq-uidity, reducing trading barriers and pro-viding better information to the market.On the basis of their experience in devel-oping the Nordic power market, theworld’s most successful; they would sug-gest a centralisation of policy-making,registration and regulatory institutions.Linking between schemes will alsoenlarge the pool of liquidity, allowingparticipants to identify emission reduc-tions with the lowest cost, providing abetter price mechanism, and encouraging

other world regions to join a globally-linked system. Critical factors will beglobal exchanges, standardised globalguidelines for market design, centralisedregistries, information dissemination andan open-ended stable framework. Workshould be directed towards a vision of aglobal downstream allowance system inwhich all activity equally reflects theprice of emissions, and in which equaltreatment removes the need for specialprotection.

Seeing beyond KyotoThe greatest value NASDAQ OMXCommodities and Nord Pool can deliveris a transparent marketplace and riskmanagement solutions which provide alevel playing field for all members. Asthis market evolves, however, the compa-ny believes a carbon trading platformmust offer the transparency, fairness andefficiency which are the hallmarks of fairand orderly markets. Ultimately, thefuture of the carbon market lies in thehands of the politicians. With increasingpolitical awareness relating to environ-ment issues worldwide, however, the pol-itics may move to supporting cap-and-trade for emissions over the next fewyears.

The future carbon market

As world leaders in derivatives and commodity trading, NASDAQ OMX Commodities and Nord Pool are clear on

which solutions the carbon market should implement in order to improve its functionality.

Geir Reigstad is Head of NASDAQ OMX CommoditiesNASDAQ OMX Commodities and Nord Pool ASA pro-vide access to the world’s largest power derivativesexchange and one of Europe’s largest carbon markets.NASDAQ OMX Commodities is responsible for theinternational derivative and carbon products offering,and also operates the clearing business and offers con-sulting services to commodities markets globally. Nord

Pool ASA is responsible for the exchange operations and trading activities,including ownership of the Nordic derivative products. NASDAQ OMXCommodities and Nord Pool ASA have more than 390 members from 22 coun-tries across a wide range of energy producers and consumers, as well as finan-cial institutions. NASDAQ OMX Commodities is an entity in the NASDAQOMX GROUP. For more information, please visit www.nasdaqomx.com/com-modities and www.nordpool.com.

THE INTERNATIONAL FORUM FOR DERIVATIVE MARKETS

30th Annual SFOABürgenstock Meetingin Interlaken

26

Event

WEDNESDAY, SEPTEMBER 9, 2009

08.45 am International Markets Regulators Meeting(by invitation)

02:00 pm Registration startsWelcome drink offered by FFiinnaannzz uunnddWWiirrttsscchhaafftt

04:00 pm OOppeenniinngg rreemmaarrkkss by Mr. Paul Meier, Chairman,SFOA, Geneva

04:15 pm WWeellccoommee aaddddrreessss

04:30 pm KKeeyynnoottee aaddddrreessss

05:00 pm ‘‘FFiinnaanncciiaall MMaarrkkeettss –– tthhee wwaayy ffoorrwwaarrdd’’

07:00 pm Cocktails

08:00 pm Private dinners (by invitation)

10:00 pm The Cosy Corner offered by PPeerrnnoodd RRiiccaarrddSSwwiissss

THURSDAY, SEPTEMBER 10, 2009

09:00 am ‘‘TThhee EEvvoolluuttiioonn ooff tthhee DDeerriivvaattiivveess MMaarrkkeettss’’

10:15 am Coffee break

10:45 am ‘‘CClleeaarriinngg AArrcchhiitteeccttuurree ooff ttoommoorrrrooww’’

12:00 pm Lunch

02:00 pm ‘‘MMaarrkkeett OOuuttllooookk’’Keynote address by Mr. Rolf P. Bertschi,Managing Director, Global Technical Strategy,Credit Suisse, Zurich

02:30 pm PPaanneell 44 –– ttbbaa

03:45 pm Coffee break

04:15 pm ‘‘SSuussttaaiinnaabbllee IInnvveessttmmeennttss’’

06:30 pm ‘‘AA gglliimmppssee ooff HHeeiiddii LLaanndd’’ highlighting Swissculture, art and gastronomywith a private performance by world-renownedMummenschanz


SPECIAL COMPANION PROGRAMoffered by Derivacom (on registration only)

Friday, September 11, 2009 from 09:15 amto 04:00 pm (incl. lunch)

Creative Mask Workshop with Mrs. FlorianaFrassetto, one of the founders of the famousMummenschanz Mask Theatre

(detailed information under Parallel activities)

Preliminary Program (follow updates on www.sfoa.org/Bürgenstock Meetings chapter)

For updated information as well asregistration forms, please visithttp://sfoa.org


FRIDAY, SEPTEMBER 11, 2009

09:00 am TTrriibbuuttee ttoo SSeepptteemmbbeerr 1111tthh

by S. Terzano/harp, and L. Mainolfi/flute

09:30 am ‘‘LLaattiinn AAmmeerriiccaa aanndd DDeerriivvaattiivveess –– tthhee wwaayyffoorrwwaarrdd’’

10:45 am Coffee break offered by IICCMMAA –– IInntteerrnnaattiioonnaallCCaappiittaall MMaarrkkeett AAssssoocciiaattiioonn

11:15 am ‘‘DDeevveellooppiinngg nneeww mmaarrkkeettss –– ggooiinngg gglloobbaall oorrssttaayyiinngg llooccaall??’’

12:30 pm Lunch

02:30 pm ‘‘IInntteerrnnaattiioonnaall RReegguullaattoorryy EEnnvviirroonnmmeenntt ––rreecceenntt ddeevveellooppmmeennttss aanndd oouuttllooookk’’

03:45 pm Coffee break offered by IICCMMAA –– IInntteerrnnaattiioonnaallCCaappiittaall MMaarrkkeett AAssssoocciiaattiioonn

04:15 pm ‘‘DDeebbaattee:: CCoommmmooddiittyy FFuuttuurreess –– bbeenneeffiicciiaall oorrddeettrriimmeennttaall ttoo tthhee rreeaall eeccoonnoommyy??’’

05:30 pm CClloossiinngg rreemmaarrkkssby Mr. Paul Meier, Chairman, SFOA, Geneva

Event

27

September 9–12, 2009

GALA EVENING (Black tie suggested)

07:00 pm Cocktails

08:00 pm Gala dinner featuring TTrriioo ddeell GGrruuppppooCCaammeerriissttiiccoo AAllcchhiimmeeaa(L. Mainolfi/flute; S. Origlia/violin andviola; S. Terzano/harp)

10:30 pm After dinner drinks and ball featuringBBeellllaa CC..

OFF THE PROGRAM(on registration only – separate payment required)

Saturday, September 12, 2009 from 09:00 amto 05:00 pm (incl. lunch)

EExxccuurrssiioonn ttoo SScchhiilltthhoorrnn ((22997700 mm // 99776600 fftt aabboovveesseeaa lleevveell))

(detailed information under Parallel activities)

Partners and Sponsors

Chi-Tech

Derivacom

EUREX

Finanz und Wirtschaft

ICMA – International Capital Market Association

National Futures Association

Pernod Ricard Swiss

SWX Swiss Exchange

Taiwan Futures Exchange

ATTENDANCE FEES (all figures are in Swiss Francs and include 7,6% VAT):Members Non-Members

Entire meeting single for payment postmarked before April 30, 2009 1.800.� 2.700.�before June 30, 2009 2.050.� 2.950.�after June 30, 2009 2.300.� 3.200.�

Entire meeting couple for payment postmarked before April 30, 2009 2.300.� 3.200.�before June 30, 2009 2.550.� 3.450.�after June 30, 2009 2.800.� 3.700.�

Children under 14 accompanying parents (must be registered) free of charge free of charge

A surplus of CHF 500.- by person will be charged if payment has not been received prior the meeting.

Charges include the conference fee, documentation, refreshments during coffee-breaks, Thursday and Friday lunches, Thursday and Fridaydinners, as well as, for those registered, participation in the companion program, on Thursday, September 10, 2009.

PAYMENT is required with your registration (invoice on request only)

either by check to SWISS FUTURES AND OPTIONS ASSOCIATIONRef: �2009 Bürgenstock Meeting�,

by bank transfer to UBS AG, 1211 Geneva 11Swift # UBSWCHZH80ACHF acct # 240 - 461.726.00X, IBAN # CH670024024046172600X, orUS$ acct # 240 - 461.726.60T, IBAN # CH680024024046172660Tin favor of Swiss Futures and Options Association(if paid in USDollars, please use the interbank US$/CHF bid quote),

or by secure online paymentsystem (credit cards) on http://sfoa.org, under Bürgenstock Meeting.

CANCELLATION Should you be unable to attend, a substitute delegate is always welcome at no extra charge.Refunds will be sent for cancellations received in writing (or by fax) before August 9, 2009,but will be subject to a cancellation charge of CHF 300.�. No refunds will be made after that date.

ACCOMMODATION We have organised special rates for 2009 at the Victoria-Jungfrau Grand Hotel & Spa. Accommodationbeing limited, we suggest that you proceed with the appropriate reservation as soon as possible.

REGISTRATION FORM 2009 BÜRGENSTOCK MEETING

MAIN PARTICIPANT

Mrs/Ms/Mr./Other Surname First name

Position Company

Address

ZIP Code City Country

Tel Mobile Fax

E-mail Company website

Arriving on Departing on Single Couple # of children:

Thursday dinner: yes no Friday dinner: yes no

DETAILS REGARDING OTHER PERSONS ACCOMPANYING MAIN PARTICIPANT (non-industry guests only)

Name (Adults) First Name Companion Program Thursday dinner Friday dinneryes no yes no yes no

Children Age yes no yes no yes no

Please make sure that each blank is filled in before you send back the registration form.Please return to: Swiss Futures and Options Association - 18b, rue du Gothard - 1225 Chêne-Bourg - Switzerland

tel # +41 22-860 2103 fax # +41 22-860 2115 e-mail: [email protected] web: sfoa.org

Registration

deadline

August9, 2009

Program and registration forms are available athttp://sfoa.org

September 9 - 12, 2009

OFF THE PROGRAM Exclusive excursion to the Schilthorn (www.schilthorn.ch), scheduled on Saturday, September 12, 2009.Please tick here to know more about conditions and to get registration material. Limited number of participants.

28

Event

Title Family Name First NameCompany PositionAddress Zip CodeCity Country CitizenshipTel Fax E-Mail

Spouse’s Name First Name Citizenship

Accompanying children: nb age(in parents’ room: under 2, free of charge / from 2 to 12, daily rate of CHF 60.- / from 12 on, daily rate of CHF 120.- incl. breakfast)

Arrival Date Departure Date

(approx. time: ) (approx. time: )

smoking room / non-smoking room *

[ ] Sperior Double room single use / CHF 425.— [ ] Superior Double room double use / CHF 525.—[ ] Deluxe Double room single use / CHF 475.— [ ] Deluxe Double room double use / CHF 575.—[ ] Junior Suite single use / CHF 655.— [ ] Junior Suite double use / CHF 755.—[ ] Suite single use / CHF 900.— [ ] Suite double use / CHF 1’000.—

These daily rates have been negociated and will only apply to registered SFOAConference participants; they includeVictoria-Jungfrau breakfast buffet, access to Spa, service and VAT (but exclude taxes of approx. CHF 3.10 per person/night).

[ ] I / we will be arriving by car, please keep a parking space for me / us (CHF 32.- by night)[ ] I / we will be arriving by plane in Bern / Zurich / Geneva*, please send me / us transportation information*please underline as appropriate

Payment method[ ] Bank Transfer on request[ ] Credit Card [ ] Visa [ ] Mastercard [ ] American Express [ ] Diners

Credit card numberName on card Expiry dateSignature of cardholder Date

Cancellation Policy: Refunds will be sent for cancellations received in writing before August 9, 2009. No refunds will bemade after that date. Exception to this rule applies in case of substitution of the party by another party to the congress.

Please return together with your conference registration form as soon as possible by fax or e-mail to:

SFOA - Mrs. Carol Gregoir - 18b, rue du Gothard - P.O. Box 325 - 1225 Chêne-Bourg - SwitzerlandTel #: +41-22-860 2103 Fax #: +41-22-860 2115 E-mail: [email protected]

Confirmation of hotel reservation will be sent to you by Victoria-Jungfrau Grand Hotel & Spa directly.

30th InternationalSFOABürgenstock Meeting

in InterlakenSeptember 9 to 12, 2009

HOTELRESERVATION FORM - Victoria-Jungfrau Grand Hotel & Spa (please type)

Event

29

Review of the 12th AnnualConference of the Asso-ciation of Futures Markets(AFM) in BudapestAfter the AFM conference visited its roots in Buenos Aires in 2007 and Asia the first time in 2008 when

Bangkok was the host, it returned this year to its home base, Budapest. The event was hosted by the Budapest

Stock Exchange and KELER (Central Depository and Clearing House), both members of AFM. Budapest is very

rich in culture and the participants had time to debate both the business issues at hand as well to enrich their

cultural knowledge.

30

Event

Summary of discussions at pre-conference workshopThe conference was preceded by a workshop entitled“Getting IT Ready” sponsored by Contango Markets andmoderated by Clive Furness. The day was aimed at providingcase studies on system implementations at (primarily) emerg-ing market exchanges around the world so that attendeescould learn from both the successes and mistakes of their peergroup. The sessions were lively and with significant audienceinteraction.From an attendee’s perspective the overwhelming value was

the honesty of the presentations. Paul Constantinou fromTrayport and Darius Cipariu from Sibex tackled the issue ofbuilding competitive advantage through choosing the righttechnology solution. The primary factor in the Sibiu choice oftrading technology was the flexibility that they could developand that would enable expansion of products, asset classes andservices. Kjell Paulson from NASDAQ OMX and Pavel Opara

from Polpx followed with a detailed account of the implemen-tation of NOMX technology in the Polish electricity market.The key lessons they shared were of the importance of com-munication and for the product and technology areas to workin harmony throughout any implementation process.The final session before lunch featured Graeme Neilly and

Myriam Condon from Patsystems and Dr. Nitus Patrayotin,President of the Agricultural Futures Exchange of Thailand(AFET). After an interesting discussion on decision making onchoosing the vendor, it covered the Pats implementation inAFET which was more of a ‘regular’ futures market implemen-tation than the previous two and providing important insightsinto key differences and similarities.After lunch, the JSE/STT team led by Rod Gravelet-

Blondin/JSE and Michelle Janke/STT discussed their coopera-tion on the development of a wide variety of systems from trad-ing through to physical delivery and clearing. The honesty with


Visiting the Hungarian House of Parliament in Budapest.

which Rod spoke of the frustrations that the exchange hadexperienced with previous technology and implementationpartners was refreshing and enlightening, highlighting thatcooperation and communication aligned with a clear knowl-edge of what the exchange wishes to achieve are the solid foun-dations for successful technology choice and implementation.The day was rounded off by John Mathias, Singapore

Mercantile Exchange, giving a geographic overview of the pub-lic/private partnership model operated by the FTIL group ofexchanges.Day One closed with the AFM General Assembly and the

Opening Dinner.

Opening and keynote addressOpening Remarks to the Conference were delivered by AFET’sDr. Nitus Patrayotin, representing outgoing AFM ChairmanMr. Sanit Vorapanya. The new AFM Chairman, Mihály Pataiof the Budapest Stock Exchange thanked Mr. Vorapanya for hiswork on behalf of the Association and welcomed everyone toBudapest.The keynote address was given by Julia Király, Deputy

Governor of the Hungarian National Bank. Using dramaticslides of natural phenomena such as tornados, tsunamis andavalanches she emphasized the huge effect the financial crisiswas having on countries such as Hungary. The Hungarianauthorities are very actively at work trying to dig out of theproblem, but it will take time and perseverance from all con-cerned. The main focus is on restoring confidence, broadenmarket liquidity and to clearly demonstrate a commitment tothe restoration of financial stability.Her slide show is available on the AFM website:

www.afmorg.net/conferences/2008-annual-conference/Conference-Proceedings.

Roundtable 1: The response of small, open marketsto global crisis – the Hungarian caseDavid Setters of Contango Markets moderated this panelwhere distinguished local panelists István Hamecz, OTP FundManager, Tamás Móró, Concorde Securities, György Dudas,CEO of KELER, Péter Duronelly, Budapest InvestmentManagement Company debated the current state of affairs ofthe Hungarian markets. All underlined the difficultiesHungarian markets faced while supporting Kiraly’s plea for aconcerted international response to the problems. This requestis not unusual since many of the problems are imported.An interesting aspect was brought out by Duronelly. He and

his colleagues are facing difficult political and ethical issues. Asa Hungarian citizen and patriot, should he be helping thedownward spiral of the local currency by moving assets away

from the forint into foreign currency, thus trying to preservevalue for clients?György Dudás, CEO, KELER described the handling of the

situation by the Clearing House. Although on a smaller scalethan the issues which the major international clearing houseshad to face they were very serious. But the situation was alwaysunder control and the CCP model had stood up well in the faceof the crisis.

Roundtable 2: Restoring investor confidenceThe current situation rattled investors’ confidence strongly.Therefore a special panel was devoted to discuss this issue. Thepanel moderated by Allan Thomson of JSE included OttoNaegeli of OEN Consulting, Simon Rostron of Rostron Parry,David Hiscock of ISMA, and Robert Ray of CME Group.The panel concentrated particularly on the perceived role

that derivatives have played in causing the financial crisis intheir respective countries and jurisdictions. Derivatives cannotbe thrown into one basket, however. The exchange tradedproducts have held up very well, thanks to their transparencyand central clearing. OTC products, however, still overwhelmthe markets and no question, some were central to the failuresin the markets. OTC products will stay, but there are a lot ofthem that could/should at least be cleared on a regulated clear-ing house.It became clear that better education is necessary in many

areas – investors, regulators, politicians, media and many oth-ers have to better understand derivatives. The panel agreed thatpopulist hype and more regulation are not the answer – thereis plenty (if not too much) regulation already! Any new regula-tion should be coordinated among jurisdiction to avoid pointsof friction and regulatory arbitrage down the road.

Event

31

AFM Annual Conference participants.



32

Event

Roundtable 3: Will Central Europe reach its potential?It was apparent from early on in this panel that one size doesnot fit all. The exchanges represented on the panel moderatedby UBS’ Bill Templer: Lidia Adamska of Warsaw StockExchange, Attila Tóth of Budapest Stock Exchange, SeptimiusStoica representing the Bucharest Commodity Exchange andDarius Cipariu of Sibiu Exchange are at different stages ofdevelopment in the growth and independence lifecycle.Obviously the region has great potential. But the current sit-

uation is very difficult. Foreign investments are needed butunfortunately the opposite is often happening these days –assets are being withdrawn. This accentuates an already diffi-cult situation. Politically a lot of work needs to be done to seta proper framework for the growth of these markets. Closercooperation or consolidation was a central discussion point. Itwas clear that while each exchange could see the benefits butthe reality remains that as important national institutions, thedesire to remain independent will overcome the benefits thatconsolidation would bring.

Roundtable 4: Wrap-up of pre-conference workshopThroughout the day Clive had been writing a list of key wordsemanating from the proposals and it was these that were usedas starting point for the round up panel session on Day 1 ofthe conference. Panelists Rod Gravelet-Blondin, PaulConstantinou, Graeme Neilly, and Chip Dempsey chose one ofthe words and gave their thoughts on the importance of ‘peo-ple’, ‘language’, ‘the curse of knowledge’, ‘education’ and theimportance of products as the drivers for any process. Prior tothe conference, the panelists had met and cunningly devised aquestion for the audience – ‘If there is a system failure who isresponsible? The exchange or the supplier?’. The discussion

that followed this question was heated and showed just howsore market users feel about this subject. Bill Templer of UBSsummed up the user perspective by saying it really doesn’tmatter who is responsible as it is the customer who bears thebrunt as the exchanges cover their liability for such events intheir terms and conditions. Clearly a raw nerve had beentouched.The day provided some very interesting panels which made

for some good discussions in the ensuing hours! A special treatawaited the delegates before dinner, a traditional Hungariandelight in a beautiful wine cellar: a reception by the Ministry ofFinance and a sightseeing tour of the Hungarian Parliament –the biggest House of Parliament in Europe.

Keynote on educationEducation is the key to success and Holland has done and con-tinues to do an excellent job of educating anyone on the meritsof derivatives products. An interesting case study presentationby Alan van Griethuysen of NYSE Euronext opened on howthis had been achieved. The presentation is available underwww.afmorg.net/conferences/2008-annual-conference/Conference-Proceedings.

Roundtable 5: Indexes – Great for markets andinvestors but how to set them up properly?This panel was moderated by Stuart Beavis, Director at HSBCFutures and Options, and included John Mathias, ChiefBusiness Officer of Singapore Mercantile Exchange, PaulMeier, Chairman of SFOA, Dr. Markus Thomas, Director ofSTOXX Ltd, and Yaman Basaran, CEO of TurkDEX.The roundtable opened with a brief history of index prod-

ucts and then went on to a more macro discussion: issues indeveloping index products in general and commodity index inparticular. The panel was clear that the index needs to reflect aworking, liquid underlying market – be it local or regional.Indices are an easy way for investors to invest in a foreigncountry – attention has to be paid that these investments do notoverwhelm a market. An index should have the potential to bea benchmark. An important question is who should set-up theindices – the exchanges themselves or an independent provider?The latter guarantees independence and fairness, but anexchange can achieve the same by having an independent bodycontrolling the indices. Central to success is a clear settlementprocess.

Roundtable 6: Energy – fit for local markets?The session was moderated by Michael Jesch, bankonManagement Consulting in Munich, and included panelistsJohn Mathias, CBO of Singapore Mercantile Exchange,

Handing over the chairmanship.


34

Event

Mrs. Rodica Popa, Romanian Power Market Operator(OPCOM), and Sverre Hakestad, Senior Vice President,Nordpool Consulting.In many areas the energy markets are not fit yet for deriva-

tives. Markets are still too fragmented, reference points aremissing and transparency must be created. Authorities mustunderstand the functioning of the markets and make properrules. There are tendencies for politicians to go to price regula-tion. This is inefficient for the cash market and bad for a deriv-atives market. Setting up a derivatives markets is facilitated ifan efficient OTC market is existing, including trading ofreceipts. Sufficient spot volumes and physical market share area pre-requisite to establish derivatives on top. Cash settlementwould certainly attract investors and boost open interest – butprobably at the detriment of the involvement of the cash trad-er for whom the derivatives trade becomes part of his valuechain. An issue to be carefully weighted.

Roundtable 7: Food crisis: myth or reality?The closing panel had a very challenging if not contentiousquestion. Under the moderation of Adam Gross, Bourse Africa,Roderick Gravelet-Blondin, JSE, Lamon Rutten, MCX, RobertRay, CME Group, Attila Kovács, Nidera, and Elena Gabre-Madhin, Ethiopian Commodity Exchange, took on the chal-lenge to discuss this.Adam Gross, summarized in his introduction how the food

crisis had impacted governmental thinking as observed at theUnited Nations. Lamon Rutten discussed the impact of gov-ernment interventions in the Indian market last year, outlininghow the suspension of four agricultural contracts actually exac-erbated some characteristics of the crisis. Non-exchange tradedfood staples showed price increases equal to or in excess ofthose traded on exchange!Everyone agreed that the crisis was real, but was one more

of affordability than availability as the spikes in prices weredriven by a combination of fundamentals, expectations andmarket conduct. The importance of education for all stake-holders was emphasized as in previous panels – too many peo-ple blame the derivatives without knowing their functioning.Important is the design of the products to facilitate a strongcommercial participation, otherwise the markets can becomeexcessively speculative. This precondition is given by mostproducts today. There is no question that speculation may havehad some part in the price rises (as it did in the recent declines)but the fundamental issues were lack of margin financing bybanks, political interventions (more than 30 countries intro-duced restrictive tariff measures among others), rising demand(China, India), lack of proper infrastructures in many places,and crop problems.

After two (for those participating in the pre-conference three)interesting days, the participants enjoyed the sights of Budapestby night on a relaxing Danube River Cruise, accompanied bygreat food and good music.

Krisztina Kasza is the GeneralSecretary of the Association ofFutures Markets (AFM). Previouslyshe was marketing manager at theBudapest Commodity Exchange.

Contact: www.afmorg.net

At the Gala evening: obviously a good joke …

YOUR 30-HOUR DAY.

When you enter the VICTORIA-JUNGFRAU Grand Hotel & Spa,you forget the pace and pressures of everyday life.

You enter a wonderful world of well-being. And discover the treasureof time. Here, time has its own special rhythm.

Each delightful day of rest and recreation lasts 30 hours.

www.vic tor ia-jung frau.ch/30hours

Höheweg 41, CH-3800 Interlaken, Phone +41 (0)33 828 28 28, [email protected]


Better Late Than Never:U.S. Senate Finally Confirms theNew Chairman of the CFTC

36

Regulation

In the last edition of Swiss Derivatives Review, Walter Lukken,currently a Commissioner and until last January the ActingChairman of the CFTC, urged President Obama to undertakea bold initiative to “scrap the current outdated regulatoryframework” for financial services in the United States. In itsplace, Mr. Lukken proposed that the Obama Administrationshould work with the United States Congress to develop a leg-islative blueprint for a fully integrated, comprehensive systemto regulate every sort of financial product traded by every classof participant in every type of market. Mr. Lukken elaboratedthat the reconfigured regulatory system should operate throughthree complementary authorities with clearly delineated mis-sions. Although Mr. Lukken’s vision for a brand new, supertriad of regulators may provide a strategic goal for the future,the current financial crisis requires Congress to get down towork with the regulatory institutions and personnel that arealready on the ground to implement a pragmatic plan this year.

Congressional CacophonySince the global financial meltdown hit last fall, Congress hasapproved massive programs and authorized unprecedentedappropriations to rescue failing financial institutions. ButCongress has yet to make significant progress in passing anylegislation to promote or enhance regulation of the marketsand financial products. During the first quarter of 2009 theCongressional calendar was jammed with multiple hearings,sometimes conducted simultaneously, by a swarm of variouscommittees asserting their claims of jurisdiction over someaspect of financial regulation. In the House of Representativeshearings were called by the Committees on: (i) Agriculture; (ii)Financial Services; and (iii) Energy and Commerce, as well as anumber of their subcommittees; while many of the same wit-nesses were appearing at hearings conducted by the SenateCommittees on: (i) Agriculture; (ii) Banking, Housing andUrban Affairs; (iii) Finance; (iv) Homeland Security andGovernmental Affairs; and (v) Energy and Natural Resources.A number of bills have been introduced by a variety of spon-sors in both houses of Congress, but none has proceeded veryfar beyond its committee of origin.In late April, Barney Frank, a Democrat fromMassachusetts

who is the Chairman of the House Committee on Financial

Services, told the Reuters Global Financial Regulation Summitthat he had urged the Obama administration to take the lead inrestructuring the financial regulators to avoid a damaging juris-dictional battle in Congress, presumably among several of theeight committees identified above. Mr. Frank has optimistical-ly set the end of this year as a deadline for the President to signinto law a comprehensive plan to reform financial regulation,but that plan has not yet been spelled out in any of the billsintroduced to date.

First Things FirstBefore it could realistically undertake a radical redesign of thefederal regulatory structure, Congress needed to confirm a newChairman of the CFTC. The Commission had not had a full-fledged chairman duly confirmed by the U.S. Senate sinceReuben Jeffery’s term was abruptly cut short when he was reas-signed by President Bush in June 2007 to become UnderSecretary of State for Economic, Energy and AgriculturalAffairs. In fact, Mr. Jeffery’s seat on the Commission has beenvacant ever since, meaning that the CFTC had been operatingwith no more than four Commissioners for the past two years.That is not to say that Commissioner Michael Dunn was

not a capable, conscientious and progressive Acting Chair ofthe CFTC during his five-month stint while Mr. Gensler’snomination was pending confirmation. In fact, Mr. Dunndemonstrated all of those qualities and more, as did nearly allof the Acting Chairs who preceded him during the CFTC’sbrief history, including such notables as Mr. Lukken, SharonBrown-Hruska and James Newsome (before he was appointedand confirmed as Chairman in his own right), Barbara Holum,Sheila Bair, Susan Phillips, Kalo Hineman and John Tull.Nevertheless, the CFTC was created by Congress in 1974 asan independent agency reporting back to Congress through itsoversight committees, the House and Senate AgricultureCommittees. Therefore, even more than the offices and depart-ments that comprise the Executive Branch of the federal gov-ernment, the CFTC Chair needs the formal imprimatur of theCongress, as well as the actual support and stewardship ofCongress, to be able to marshal the political authority andresources needed to maximize the agency’s impact and fulfillits regulatory mission.

Congress took an essential step toward restructuring the regulation of derivatives in the United States on May

19, 2009, when the U.S. Senate voted 88-6 to confirm the nomination of Gary Gensler as Chairman of the

Commodity Futures Trading Commission. But if Mr. Gensler’s appointment as CFTC Chairman was so crucial to

reinforcing regulation of the financial and commodities markets, why did the Senate take five months to

approve it? The tortured process that characterized Mr. Gensler’s confirmation, described below, provides

insights into the challenges facing President Barack Obama and his administration as they undertake the cru-

sade to fashion a new regulatory structure, guide it through a maze of Congressional committees that range

from factious to dysfunctional, and develop a majority coalition in each chamber of Congress to enact legisla-

tion to realize their vision.


Gary Gensler

Presenting the New Chairs: One Takes the Fast Lane …On December 18, 2008, a month before his inauguration,President-elect Obama held a press conference to introduceMr. Gensler as his choice to lead the CFTC and Mary Schapiroas his nominee to chair the SEC. Less than a month later, onJanuary 15, the Senate Banking Committee held its confirmationhearing on Ms. Schapiro’s nomination, and two weeks later (justone week after Mr. Obama was inaugurated as President),Ms. Schapiro was sworn in as the new Chairperson of the SEC.Within the first three months of her term,Ms. Schapiro had filledmost of the senior positions on the SEC staff, including Chiefof Staff, General Counsel, the Directors of the Divisions ofEnforcement and Corporation Finance, and Acting Co-Directorsof the Division of Trading and Markets, as well as a number oftheir deputies. So she is already well on her way to reinvigorat-ing the SEC.

… the Other Takes a DetourIn stark contrast to the alacrity with which the Senate movedto approve Ms. Schapiro’s appointment, the Senate AgricultureCommittee did not even schedule Mr. Gensler’s confirmationhearing until February 25. Going into the confirmation hear-ing, several Senators, most notably Committee Chairman TomHarkin, a Democrat from Iowa, had questions about Mr.Gensler’s participation in the passage of the CommodityFutures Modernization Act in 2000 (the CFMA) when he wasUnder Secretary of the Treasury in the Clinton Administration.Last November Senator Harkin undertook to close what heperceived as gaps in regulation created by the CFMA by intro-ducing the Derivatives Trading Integrity Act, which amongother things would require nearly all derivatives contracts to betraded on a regulated exchange. While his bill continued to lan-guish in the Senate, Chairman Harkin opened Mr. Gensler’sconfirmation hearing by observing that regardless of whateverlaws Congress may pass in attempt to improve regulation, thesuccess of the undertaking would ultimately depend on the reg-ulators. He reminded his committee, “Frankly, the best inten-tioned and most brilliantly crafted legislation will be only aseffective as the regulators who will implement the law. We musthave an unflinching determination on the part of theCommodity Futures Trading Commission to restore integrityto these important markets. That’s why the position ofChairman of the CFTC is so critical.”In anticipation of questions by members of the committee

about his limited role in the passage of the CFMA in 2000,Mr. Gensler acknowledged: “The current economic crisis clear-ly has shown that our financial and regulatory systems havefailed the American people terribly. Those of us who have spentour professional lives around markets have to approach thecurrent crisis with humility following these broad failures …We have learned that there is no substitute for strong inde-pendent regulation and that transparency and accountabilityare essential throughout the system …We must now repair our

regulatory system by enacting much needed reforms that pro-mote transparency, fairness and safety.”In recognition of Mr. Gensler’s strong credentials in the pri-

vate and public sectors and his straightforward testimony at theconfirmation hearing, the Senate Agriculture Committee unani-mously voted on March 18 to recommend to the full Senate thatMr. Gensler be confirmed as CFTC Chairman. Following thatvote Chairman Harkin commented: “With our current econom-ic crisis, it is painfully clear that our nation’s financial systemrequires a much stronger and more effective regulatory scheme,and it is important that we have an effective leader at theCommodity Futures Trading Commission. At his confirmationhearing, Mr. Gensler responded to our questions carefully andknowledgeably; I am hopeful that he will lead effectively inreforming and restoring regulation of trading futures and otherderivatives contracts.” Notwithstanding the unanimous endorse-ment by the Senate Agriculture Committee, two senators whowere not members of the Committee managed to derail Mr.Gensler’s confirmation process for the next two months.

Why the delay?In short, it was politics as usual on Capitol Hill, but with a fewtwists. This was not simply a matter of partisanship; in fact nei-ther of the senators who put an official “hold” on Mr. Gensler’sconfirmation were Republican. Nearly all news reports at thetime identified one of the challengers as Bernie Sanders, anIndependent from Vermont, who blamed Mr. Gensler for seek-ing to exempt credit default swaps from regulation under theCFMA. As long as Mr. Sanders exercised his veto, no other sen-ator who objected to Mr. Gensler’s nomination needed to stepforward. That was convenient politically for the other senatorblocking the vote on Gensler’s nomination, Maria Cantwell, aDemocrat from Washington. Although she had maintained alower profile than Senator Sanders in delaying the confirmationprocess, she had been critical of the CFMA ever since 2001when electricity rates spiked on the West Coast in the wake ofEnron’s meltdown.

A Delicate BalanceUnfortunately two recalcitrant senators are more than enoughto block such a vital appointment. Like the SEC, the CFTCconsists of five commissioners appointed by the President, withthe advice and consent of the Senate, to serve staggered five-year terms. No more than three commissioners at any one timemay be from the same political party. The President designatesone of the commissioners, normally from his own party, toserve as chairman. The terms of the commissioners are stag-gered so that only one expires each year, and presumably theefficacy of the commission would not be threatened by a singlevacancy while a new nominee is selected and confirmed to fillan expiring term. Whenever one of the slots on the CFTC orthe SEC becomes vacant, however, the White House in consul-tation with Congressional leaders customarily waits for a sec-ond vacancy to open up on such commission so that aDemocrat may be paired with a Republican to facilitate theconfirmation of both nominees. As a result, a qualified nomi-nee may be held in abeyance for months until another openingis created and a suitable nominee of the other party is submit-ted for consideration. That sort of quid pro quo, of course, isbetter suited for commissioner vacancies, and is not as adapt-able to the confirmation of the chairman. Furthermore, SenatorSanders’s status as an Independent and Senator Cantwell’smembership in the President’s majority party made it difficult

Regulation

37


38

Regulation

to devise a political solution that would induce them to lifttheir roadblock to Mr. Gensler’s confirmation.

An Unlikely Hero Saves the Day: The TreasurySecretary Writes to CongressThe impasse dragged on for nearly two months until TreasurySecretary Timothy Geithner rode to the rescue on May 13,when he delivered his celebrated letter to Congress outliningthe Obama Administration’s comprehensive plan to regulatethe over-the-counter (OTC) derivatives market. To contain sys-temic risks, Secretary Geithner proposed amending theCommodity Exchange Act (CEA) and the securities laws torequire that all standardized OTC derivatives contracts becleared through central counterparties (CCPs). The Admin-istration’s plan was designed to (i) prevent activities in the OTCderivatives markets from posing risks to the financial system;(ii) promote efficiency and transparency in the derivatives mar-kets; (iii) prevent market manipulation, fraud and other deriv-atives market abuses; and (iv) ensure that OTC derivatives arenot marketed inappropriately to unsophisticated parties.Secretary Geithner reported that the SEC and CFTC had

already begun reviewing the current laws and regulations topropose amendments that would promote the four primaryobjectives, by imposing additional disclosure requirements orstandards of care for marketing derivatives to less sophisticat-ed counterparties such as small municipalities or imposingderivatives position limits on counterparties and within prod-uct-specific markets. The Administration’s plan would apply toderivatives dealers, end-users and any other firm whose activi-ties may result in significant exposures to counterparties.Secretary Geithner specified that a robust regulatory regimemust include (i) conservative capital requirements for counter-parties; (ii) business conduct standards for the industry andcounterparties; (iii) more stringent reporting and recordkeepingrequirements for participants; and (iv) conservative marginrequirements for counterparties and CCPs.Secretary Geithner also advocated enhancing the trans-

parency of the OTC derivatives markets by amending the CEAand the securities laws to authorize the CFTC and the SEC toimpose new recordkeeping and reporting requirements on alltypes of entities trading such derivatives. CCPs would be sub-ject to additional regulation and required, among other things,to report data on open counterparty trades and product-specif-ic trading volumes to the CFTC, SEC or any applicable regula-tor. The Obama Administration sought to provide regulatorswith a more comprehensive and accurate measure of deriva-tives activity and the risks such activity poses to the entirefinancial system, and to develop a robust reporting system tosupport the price discovery function.Just a few hours after Secretary Geithner held his press con-

ference to present his letter to Congress, Senators Sanders andCantwell lifted their holds on Mr. Gensler’s confirmation asboth senators expressed their support of the Obama adminis-tration’s proposal. Nevertheless Senators Sanders and Cantwellwere among the six votes against Mr. Gensler’s nomination.Remarkably, the other four who voted against his confirma-tion, Senators Dorgan, Shaheen, Merkley and Murray, were allDemocrats.

Fully Restoring the CFTCMr. Gensler’s confirmation served a dual purpose: in additionto getting a new Chairman, the CFTC was restored to its fullcomplement of five Commissioners. Now, to bring the

Commission fully up to date, the White House needs to workwith Congress to renew two expired terms on the CFTC:Commissioner Bart Chilton’s term formally expired in April2008, and Commissioner Jill Sommers’s term expired in April2009. Meanwhile, the SEC operates at full strength with all fiveof its Commissioners, four of whom have been sworn in with-in the past year. It is no coincidence that in 2000 when CFTCrewrote its rulebook to introduce principles-based regulation tothe futures markets which was codified by Congress in theCFMA, the CFTC was operating at full capacity, led by a bril-liant and decisive Chairman, William Rainer, and four otherfully engaged Commissioners.

CFMA ReduxEven though, as he testified at his confirmation hearing, Mr.Gensler may have played only a limited role in the passage ofthe CFMA in 2000, his contribution to that legislation atteststo, rather than detracts from, Mr. Gensler’s qualifications tolead the CFTC. In the same vein, Lawrence Summers’ steward-ship of the CFMA as Clinton’s Treasury Secretary in 2000 in noway deterred President Obama from enlisting his expertise dur-ing his presidential campaign and bringing him to the WhiteHouse as the President’s senior economic advisor.Although the CFMA has been blamed by Congress and the

media for exacerbating the financial crisis, certain positivemeasures enacted by it provide the means and tools for work-ing out solutions to the crisis and the regulatory failures thatmay have contributed to its scope and severity. After all, theCFMA explicitly permitted clearing for over-the-counter deriv-atives, codified principles-based regulation for the futures mar-kets, established a flexible regulatory framework for innovativetrading systems and exchanges for new products, introducedjoint jurisdiction and coordinated regulation by the SEC andCFTC for stock futures, and extended CFTC jurisdiction toretail forex trading. Some of those components will serve asthe bases for whatever regulatory changes are effectuated bylegislation enacted in response to Secretary Geithner’s letter. Inmany respects the measures outlined by Secretary Geithner areextensions, variations or recalibrations, rather than reversals,of regulatory innovations introduced in the CFMA. Moreimportantly the progressive elements of the CFMA were thedirect results of the shared vision of the principals, the mem-bers of the President’s Working Group on Financial Markets,and the cooperative efforts of the staffs from the TreasuryDepartment, the Federal Reserve, the SEC and the CFTC. Thatis precisely the sort of regulatory cooperation and integrationthat needs to be promoted by Congress to reduce systemic riskand to prevent any new products from slipping through thecrevices of the statutes and regulations governing the marketsin the US. That same principle of regulatory cooperation, ofcourse, needs to transcend the borders of the US and continueto spread and flourish throughout the global marketplace.

C. Robert Paul is Counsel in theNew York office of DLA Piper LLP(US). He was General Counsel ofthe Commodity Futures TradingCommission 1999 to 2001.

In the past five years, the VIX® Index has moved opposite of theS&P 500® Index more than 80% of the time.*

To take advantage of this market dynamic, trade options futures on the VIX,a pure play on implied volatility, and diversify your portfolio with a highly liquid asset

class like no other. Visit www.cboe.com/vix to learn more.

*CBOE data and Bloomberg, cboe.com.CBOE®, Chicago Board Options Exchange®, CBOE Volatility Index® and VIX® are registered trademarks of Chicago Board Options Exchange, Incorporated (CBOE).CFE® is a registered trademark and CBOE Futures Exchange is a servicemark of CBOE Futures Exchange, LLC (CFE). S&P 500® is a trademark of The McGraw-HillCompanies, Inc. and has been licensed for use by CBOE. Copyright © 2009 CBOE Futures Exchange, LLC. All rights reserved.

or


Precious Metals: theproven calm in the stormInvestors are increasingly seeking alternative asset classes to diversify portfolios and attempting to recover

capital lost as a result of the economic downturn. The alternative nature of precious metals assets has attract-

ed the interest of a variety of investors including hedge funds, pension funds, insurance and reinsurance carri-

ers, family offices and endowments.

40

Com

modities

After starting the year around $870 in gold, $11 in silver, $925in platinum and $185 in palladium, the metals complex hasdecoupled from the usual market drivers and launched a newparadigm of haven buying. Fear and uncertainty started to dic-tate the market while ignoring important fundamental factorssuch as declining oil, missing jewellery demand and heavyscrap selling. Funds began to tackle gold as hard assets to bal-ance the risk. Metals accounts remain first choice for dailyspeculators, where investors and funds are increasingly lookingfor physical metals through ETFs or physical bank vault hold-ings.Gold remains the main driver of the metals complex bring-

ing its shine to all kinds of areas, like the fashion world, whereMrs. Obama came with a golden dress to the Presidential inau-guration. After a decade of cool metal popularity, such as plat-inum and silver, gold is back in vogue. Gold is also making ahuge comeback in makeup, jewellery and apparel.As mentioned above, the physical business has shifted from

the jeweller demand in China, Middle East and India toinvestors demand. There should be high season for burglarswith many individual home vaults filled with gold and peoplewalking around with gold bars in their pockets. In order toavoid this risk, investors choose to keep the gold in a collectiveor segregated bank vault, where the gold is kept off the balancesheet of the bank and with the client as sole owner.The recent run on physical gold was triggered by fear of sys-

tematic risk and the chance for gold to become a currency.Remember that a gold bar is the only currency free of debt.Huge amounts of rescue packages triggered additional worriesabout long term inflation and investors do not forget the goldas best performing asset in difficult times, where the currentglobal crises will take a lot longer than the previous local one.The limited availability of coins has given the market anotherboost. We have to be careful though not to confuse scarcity dueto the size of the coins market with the shortage of gold barsbecause of backlog of production, as there is plenty of abovegold available.For central banks gold has become an important asset again,

which at current rates does not make sense to be lent to themarket. The central bank agreement has not been taken advan-tage off in full and many attempts of political pressure to sellgold reserves have been resisted.With the recent de-leveraging the numbers and sizes of funds

have diminished and so the current long positions held in ETFs,on exchanges and in vaults represent a scary long position,which should worry us if it would not be for long term inten-tions.Unfortunately the latest trend does also bring out the temp-

tation of fraud. These days there is not one day, we are not

approached by serious people proposing buying, selling ormatching enormous quantities of gold which can range from100 to 15,000 metric tons and which are evidently non exis-tent. The catch usually is the appealing commissions or greed,which makes people blindfolded. The certificate business isanother collateral appearance, where people show up with cer-tificates from banks that pretend to guarantee huge gold hold-ings but which are falsifications easy to note by professionals.It is amazing how much time is wasted on such unpleasantbusiness proposals all over the world.Silver was primarily attractive due to its cheap price and

high ratio to gold over the past few months. Clearly, it startedto catch up on some physical safe haven buying, where cus-tomers are not inclined to pay a value added tax for physicaldelivery. The problem is the bulky bars and heavy weight, tak-ing up a lot of space for little value, but it remains the poorman’s gold.Platinum’s bad economic outlook combined with little inter-

est from the car industry. Buying has been discounted in themarket during the last year’s steep decline from $2,200 to$750. An important scoop of platinum being its discount togold, which has only lasted for short periods in the past, trig-gered fresh speculative and longer term investment interest.Yet, a lot of investors remained cautious, either because theywere still long from the way down or hesitant to participate ina relatively illiquid market.Palladium has a similar attraction, but has performed nega-

tive over the past five years. PGM remain industrial metals and– unlike gold – are closest to a commodity. Jewellery remainsthe only positive element that could help to revive platinumand palladium.The only time I remember that coins were on the limelight

was the US boycott of the Krugerrand gold coins, the SilverEagles run, and finally the end-of-the-world fears during theMillennium. Eventually, most coins came back to the marketbut this time it feels different as the entire world seems to havetaken hold of the idea that gold coins could become the next oronly form of payment to gather goods as last resort. During flattimes there was such a liquidation of Swiss Vrenelis and othercoins, which wanted to be exchanged against shares, that manyof those used and old fashion coins where melted down. Aglobal misconception, as in the meantime every stock marketshowed a lesson to remember to the new generation, and whichexplains today’s shortage of certain gold coins.It is worth looking at the remaining potential of gold, which

limit is far from being reached – and this is in my eyes the moststriking factor. The chart below shows the part of global ETFholdings ($43 billion) as a small slide, compared to the USMoney market holdings of $3.850 trillion. The yellow metal is


not a crowded trade and the man or woman in the street andmany other investors missed the opportunity to buy cheap. Sothe question is permitted, whether it is really the price that mat-ters in a world where nothing is today how it was? For mostsmart investors it does not. How much do we pay each year forinsurance, for healthcare or luxury goods? Do we worry aboutthe premium spent? Being wrong with a percentage invested ingold and right with the remaining investments still offers a pos-itive return and in these long lasting crises those theories willcontinue to be a wise choice.

Com

modities

41

Andy Maag is heading up the SwissPrecious Metals Distribution deskat UBS Investment Bank. Prior totaking up his post in January 2007in Zurich, he spent eight years atseveral branches of SBC Swit-zerland, over a year at CCF Paris,ten years at the SBC Precious

Metals Desk in New York, one year at SBC Bahrain and13 years at UBS Geneva. Andy has been writing severalarticles about Precious Metals in diverse Swiss FrenchNewspapers. He graduated in 2000 from the BusinessSchool Lausanne with an Executive MBA. Andy practicessports like biking, running and enjoys long distancewalks. He is married since 1983 and has two children.

ETF Holdings

US MoneyMarket Funds

Source: UBS

• Total global holdings in ETFs are about $43 billion• US Money Market holdings $3.850 trillion

Continued from page 50

The model takes the most important requirements of allEUSIPA members into account by introducing a gener-al distinction between investment products and leverageproducts for the first time. It also allocates products tosubcategories in accordance with how they pay out tothe investor.The calculation of value at risk allows the position-

ing of structured investment products within the port-folio context and facilitates the investment and consult-ing process. The introduction of a risk measure allowsto visualize the risk of loss while the categorizationreduces product complexity. Additionally, these instru-ments offer added value along the consulting process.This in terms of suitability with regards to investmentsin these products.

OutlookInvestors will continue to include structured investmentproducts in their portfolio holdings because of severalreasons. One of the key benefits of these products isthat they can be tailored to meet specific objectives, interms of both return and risk, offering different levels ofboth exposure to upside potential and downside pro-tection.Structured investment products can also be used to

create access to an asset class they weren’t previouslyexposed to or didn’t feel comfortable with. Commodi-ties are a good example. Clients who aren’t exposed tocommodities in a traditional portfolio may wish todiversify their assets without incurring risks of capitalloss and they can do that through capital protectedstructured products.Once structured investment products were just

focussing on equities and bonds as underlyings, butnow almost every underlying is investible with the helpof these instruments.These specific benefits associated with structured

investment products will be a key driver in the upcom-ing years of the expanding demand in these products.Of course like with any other financial decision,investors need to consider some key points beforedeciding on a structured investment product purchase,including the investment terms, level of risk taken on,complexity of the pay-off profile, tax treatment andcounterparty risk. That considered, the way is clear fora successful investment in structured investment prod-ucts.


Eurex’s entry into thecommodities spaceLeveraging its extensive experience in financial derivatives, Eurex, the international derivatives exchange,expanded its strategy to alternative asset classes to meet the growing demand of its clients for exchange-trad-ed derivatives in this segment. Under current market conditions, trends such as reducing counterparty creditrisk and margin requirements increase the appetite for centrally cleared derivatives in various asset classes.

42

Com

modities

By extending into alternative asset classes, Eurex pursues a strategythat is gaining popularity in the financial markets. Pension funds andasset managers increasingly invest in assets which display low or neg-ative correlation with equities and bonds to benefit from diversifica-tion. At present, market makers and proprietary firms make use oftheir existing technical infrastructure and trading strategies in otherasset classes. In response, exchanges continue to offer additionalproducts, optimizing their idea of a true one-stop shop.The starting point of Eurex’s move into alternative assets was

marked by the December 2007 launch of CO2 emission derivativeson Eurex in cooperation with the European Energy Exchange (EEX).Since the beginning of 2009, three products have been added: GoldFutures and Options, based on the London Bullion Market Fixing,followed by futures on commercial property returns measured by theIPD UK Annual All Property Index. In March, four cash-settledfutures based on the Dow Jones-UBS Commodity IndexSM and itssubindexes (Agriculture, Energy and Industrial Metals) went live,continuing Eurex’s product diversification strategy.

Futures on the broad commodity market …In May 2009, AIG and UBS concluded the transfer of ownershipof the Dow Jones-AIG Commodity IndexesSM to UBS. Originallylaunched in 1998, the renamed Dow Jones-UBS CommodityIndexSM (DJ-UBSCISM) retained an identical methodology, formand format to the Dow Jones-AIG Commodity IndexSM. This indexfamily remains one of the two leading commodity indexes in termsof assets linked to it. By employing sector caps, it is less energy-focused than the S&P GSCITM index.Eurex uses the excess return version of the DJ-UBSCISM family,

which includes both the movement of the spot price and the rollingreturns of the individual components. With both the DJ-UBSCISM

and the S&P GSCITM invested more on the short-end of the curve,their performance is negatively influenced by the rolling in timeswhen many commodities are in a contango situation. Contangodescribes the shape of a term structure, where the back monthprices are higher than those at the front. For example, one poten-tial trading strategy could be to go short in the DJ-UBSCISM intimes of strong contango and go long another index which tendsmore towards the longer end of the curve.Over the last five years, total investments in commodity index

products increased from USD 20 billion to USD 90 billion, while atits peak it was almost USD 200 billion before commodity prices fellin the second half of 2008. There are several drivers for this extraor-dinary growth. Trading in commodities has developed strongly andalong with it the use of commodity indexes. The increase in com-modities trading has mainly been motivated by diversification,inflation-hedging, geopolitical reasons and the high volatility ofcommodities. Indexes are used to reduce volatility, all the more inbear markets, where correlation is rising and investors are lookingfor downside protection. Additionally, regulations restrict certaininstitutions in their use of single products like oil futures or physi-cally settled products. As all important commodity indexes consistof single commodity futures, index investment has the advantage of

outsourcing the rolling, rebalancing or recomposing of a broadercommodity portfolio. Using index futures also adds to cost-efficien-cy by limiting the number of margin deposits to just one.Most commonly, institutions invest in commodity indexes via

OTC swaps. The new Eurex futures offer these investors an alter-native tool, complementary to the OTC markets. Not only do theysignificantly mitigate the counterparty risk of standardised posi-tions, but also increase transparency through market makingquotes and allow players with limited OTC access to participate inthe market. The relatively small contract size of the Eurex futures(USD ~20,000 per contract) enables fine-tuned hedging and effi-cient cash flow steering. For in-and-out trading, futures are in gen-eral the preferred tool: they combine the possibility to go long andshort with the same instrument during the trading day with liquid-ity from multiple market makers and very low transaction costs(USD 1 per contract). Apart from trading in the order book,traders benefit from central counterparty credit risk mitigation byentering bilaterally negotiated trades from 100 contracts onwardsdirectly into the clearing house.

… as well as on Agriculture, Energy and Industrial MetalsMost of the OTC trading in the Dow Jones-UBS CommodityIndexesSM is on the composite level. However, there are also goodreasons to list the subindexes as an offering to market participantswho concentrate on one of the sub-sectors. Moreover, the differ-ences between DJ-UBSCISM and S&P GSCITM are smaller on thesubindex level. As commodities are not a very homogenous assetclass, the behaviour of individual subindexes can be quite different.In 1999, while the DJ-UBS Agriculture SubindexSM experienceddeclines of more than 20 percent, Energy went up by approximate-ly 75 percent. By concentrating on subindexes, additional tradingstrategies can be created. For example, if one expects a faster post-credit-crisis price recovery in Industrial Metals than in the overallmarket, one can trade the subindex against the composite.Supporting its diversification strategy, Eurex initially selected

three subindexes: Agriculture, Energy and Industrial Metals. It isvery likely that other sectors, such as Precious Metals, Livestock orPetroleum will follow at a later point. Depending on the success ofthe futures contracts, options on some of the indexes will be added.Currently, three market makers (Unicredit, Flow Traders andBanca IMI), are actively quoting the Dow Jones-UBS CommodityIndexSM Futures. It is expected that UBS is going to make marketsas well.

Ralf HuesmannEurex Product StrategyContact: +44 207 862 7018For further information, visitwww.eurexchange.com/commodity

What do you need to be successful in today’s futures and options markets? Access

to global trade flow that offers efficient pricing? State-of-the-art clearing

technology that connects to any system of your choice? At UBS, we combine these

capabilities with a leading global franchise to help you execute and clear

your transactions with speed and efficiency across all major exchanges around

the world.

You & Us. A partnership for success.

www.ubs.com/futuresandoptions

The key to your success in theFutures andOptions industry

You&Us

This material has been prepared by UBS AG, or an affiliate thereof (“UBS”). This material is for distribution only under such circumstances as may be permitted by applicable law. It has no regardto the specific investment objectives, financial situation or particular needs of any recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer tobuy or sell any securities or related financial instruments. It is not intended to be a complete statement or summary of the futures and options markets. It should not be regarded by recipients as asubstitute for the exercise of their own judgement. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. United States: Thesematerials are distributed by UBS Securities LLC, a subsidiary of UBS AG, or solely to US institutional investors by UBS AG or a subsidiary or affiliate thereof that is not registered as a US broker-dealer(a “non-US affiliate”), any transactions resulting from materials distributed by a non-US affiliate to US investors must be effected through UBS Securities LLC. © 2008 UBS. All rights reserved.


Globalization of financialengineering: the impact of theeconomic crisisFinancial engineers have been clearly battered by the current economic crisis, both in terms of reputation and

employment. Andrew Sheng, chief advisor to the China banking regulatory commission notes that, “Now we

have financial engineers pretending that they are creating value, and the state is pretending that the value still

exists.” Mark Cuban, Dallas Mavericks owner, blogs that, “We have to make the upside based on investments,

rather than financial engineering.” Hmm, I wonder if I would be qualified to comment on the performance of the

Mavericks in the play-offs this season? Perhaps the discipline of Financial Engineering is less to blame than

the quick finger pointing implies.

44

Career

The cause of the crisis, like most financial crises, is rarely onegroup of people. Instead, it is a confluence of decisions by pol-icy makers, markets participants and the consuming public.“Quants” are trained to use mathematical tools to measure andprice risks associated with various market instruments. It couldbe argued that there was an inadequate pricing of the risk levelassociated with the CDO and CDS products. What is un-debat-able is that financial engineers have drastically altered our per-ception and understanding of risk with new models ofincreased complexity for pricing. The discipline is nascent how-ever, and our understanding of risk has expanded greatly withthe current economic crisis. It may be that the models were notreally wrong, but perhaps the data or inputs were inadequateor the decisions about the level of risk the firm should under-take were faulty.Robert Jarrow of Cornell indicates that perhaps the crisis

may have been averted by better models or more thoughtfulmodeling. The meltdown has actually increased the need formore Financial Engineering techniques rather than less.Andrew Lo of MIT notes that, “Financial engineering is nomore responsible for the crisis than aerospace engineering wasresponsible for the Space Shuttle Challenger explosion in 1986;in both cases incorrect human judgments involving inappropri-ate uses of technology led to disaster.”There are indications that management at the financial insti-

tutions apparently placed little to no weight on the risk assess-ments of the financial engineers that clearly warned of largepotential losses in the face of a downturn in the US residentialreal estate market. Thus, it may be that inadequate knowledgeor greed (due to successes during low volatility) were amongthe root causes of the crisis.Another risk approach is the VaR models used by firms.

These models have an inherent problem in the data used tomake the forecast of exposure – during periods of reducedvolatility, VaR is lower with resultant perceptions of reducedrisk, while during periods of high volatility, VaR is now muchhigher resulting in perceptions of much higher risk. Thus, to adegree the model is now self-correcting with the new data, butthe issue was the data period used for the first modeling. Thisperiod of the 1990’s and 2000’s was characterized by very lowvolatility in interest rates and markets. Building models basedon this data is clearly problematic.Jarrow and others indicate that there is now an increased

need for better risk management during turbulent times.Indeed, the need for better trained financial engineers is alreadyon the rise. We are already beginning to see an increased

demand for financial engineers, even in the face of the layoffsat the investment banking firms. And, to a certain extentbecause of it; laid-off employees are taking the opportunity toincrease their quantitative skills and are going back foradvanced degrees.Plus, the demand for financial engineers continues to be

unabated in other parts of the globe as well as reported by RonAlsop of the Wall Street Journal, “America’s finance programsare a great magnet for the best quantitative talent in the world,from countries such as India, France, China, and Korea. Morethan half of the students in quantitative finance programs aretypically international.” For example, Kent State recentlybegan a cooperative partnership with Xiamen University, awell-ranked school in China, for Chinese students to takecoursework at both Xiamen and Kent State that leads to aMaster of Science degree in Financial Engineering. “Five yearsago a Master’s degree in financial engineering was unheard ofin Asia. But today, it’s the degree everyone wants”, saidYongmiao Hong, dean of the WISE Institute at XiamenUniversity. The financial engineering program has proven to bethe most popular degree offered by Kent State in China.I think Andrew Lo sums it up best, “By training tomorrow’s

leaders to manage the risks of the financial system effectivelyand ethically, we shall have a fighting chance of surviving eventhe largest crises. This is what business schools do and we needto do more of it, not less.” I believe the world is listening.Graduating Financial Engineers are now just completing theirspring finals, and a new larger global crop of financial engi-neering students are gearing up to take their place this fall!

Dr. Mark Holder is director of KentState University’s Financial En-gineering Program (MSFE) andchairman of the Department ofFinance. He is also editor of thejournal Review of Futures Markets.Prior to joining Kent State, Dr.Holder was a senior economist and

group manager at the Chicago Board of Trade, where heparticipated in the design, launch, and marketing of theDow Jones Industrial Average futures and futures optionscontracts. He also was responsible for Asian marketintelligence for CBOT strategic analysis research.Contact: [email protected]


Cooperation beats competitionwhen educating investorsInvestor education is critically important for providing the customer base necessary for a marketplace to grow

and thrive. This is particularly true for derivatives markets where investors need to understand more than buy

low, sell high.

46

Career

Although the differences and complexities of derivatives com-pared to equities require more education, the differencesamong exchange-listed derivatives can be fewer. In cases wherecontract specifications are similar, or identical, common trad-ing strategies will exist allowing for the possibility of coopera-tive educational efforts – both within and across borders.This was where the options exchanges in the U.S. found

themselves nearly 20 years ago when they decided to cooperateon investor education. Those educational efforts played a keyrole in the phenomenal volume growth of the past decade,along with important competitive market structure changes.Years of work building a knowledgeable investor pool is againshowing returns as contract volume continues to rise becauseinvestors recognize the importance of options in these difficultmarket conditions.

U.S. options exchanges form educational allianceIn 1992 the U.S. options exchanges and The Options ClearingCorporation formed The Options Industry Council as a way ofcombining and streamlining investor education efforts, and tocombat the negative image of derivatives trading left over fromthe 1987 market crash. The crash caused a drop in demand forall derivatives and equity options saw volume drop 35 percentbetween 1987 and 1991.OIC’s mission of educating investors about the risks and

benefits of exchange-listed equity options met with successfrom the very beginning, clear-ly demonstrating the demandfor options education. Its firstoffering, a 20-minute educa-tional videotape, brought30,000 requests in the firstthree months. That type oftrend has continued with eachnew OIC educational resource.The launch of educational podcasts a couple of years ago, forexample, saw more than 33,000 downloads in the first month.The options exchanges are fierce competitors for volume in,

generally, the same equity options, but they come together andshare expertise and instructors to further the goal of investoreducation. Funding for the live seminars, webcasts, podcasts,three websites, booklets and many other materials is shared bythe exchanges and OCC and provided to investors for free –with a few low cost exceptions. The entire U.S. options indus-try comes together on education issues because they share theconviction that growing the whole pie will increase the size ofeveryone’s slice.

Global information sharingThe U.S. equity options industry is the largest in the world,generating USD 1.9 trillion in premium last year while con-tracts exercised on stock and ETF options resulted in the trad-ing of 43 billion shares worth USD 2.3 trillion. A significant

percentage of the 3.6 billion contracts traded in the U.S. in2008 originated with orders placed from outside the U.S. Asthe options business has become more global, the U.S. optionsindustry has broadened the scope of its philosophy on educa-tional cooperation.In the past year, OIC has signed five content licensing agree-

ments with exchanges around the world in order to shareinvestor education material. The agreements extend variousOIC educational offerings to exchanges in Canada, Europe,Asia and the Middle East, in emerging markets, mature marketsand mature equities markets with nascent options marketplaces.In all of the cases, the exchanges are able to leverage exist-

ing and proven effective educational resources provided for freeby OIC. The exchanges might incur minor costs for items such

as translation of the materialor travel for an instructor, butthose are minimal expenses forthe ability to quickly providinga full suite of educational offer-ings to investors.Rather than reinventing the

wheel, partnering with estab-lished education providers or

pooling resources with similar institutions, even competitors,can be the best way to ensure investors have the knowledgethey need to participate in the marketplace. The experience ofthe U.S. options industry is that the more informed investorsare, the more likely they are to trade – and continue to trade –and cooperative efforts are the most efficient way to educatethose investors.

“The U.S. options industry coop-erates on education becausegrowing the whole pie increasesthe size of everyone’s slice.”

Jim Binder is the Director of PublicRelations for The Options IndustryCouncil and The Options ClearingCorporation. Previously he wasManaging Editor of the Standard& Poor’s newsletter SecuritiesWeek.www.optionseducation.org

Total Volume 1993–2008

In early 2008, a group of people from the futures industry came together to form Futures for Kids, a charitydesigned to pull the industry together, raising funds for children’s charities.

Giv ing Someth ing Back

Why did we do it? The futures and options industry has been one of the most successful over the past 20years, with consistent growth and expansion across products and geographies. Many firms and individualshave benefited from the growth of the business and we wanted to provide a vehicle to enable them to givesomething back to the community.

… The difference we are able to make as a group to so many children’s lives is amazing

The response from both firms and individuals has been phenomenal. We have had a number of events, whichhave raised over £200,000 between them, a highly successful ‘Trading for Charity’ day by one firm and anumber of signif icant donations from firms and individuals alike. In our first year, we raised over £400,000.

… What you can do to help

There are so many ways that every firm or individual can support FFK; whether you want to make a donation,to provide sponsorship for events or to encourage your colleagues to participate in fund raising activities, allmonies raised go to the charities.Futures for Kids is established and run by volunteers and we would love to have your support.

To find out more about Futures For Kids and your opportunity to win an ounce of gold, among othergreat prizes kindly donated by the Swiss Futures and Options Association, come and talk to us at the

30 th SFOA Bürgenstock Meeting

HopeHIV is about the generat ion of hope.I t supports children and young people insub-Saharan Africa who have beenorphaned or affected by HIV/AIDS. Itsini t iat ives work on the principle thatteenagers pay more attent ion to eachother than to adults. Trained as positiverole models, young people can helpfriends avoid HIV infection, as well asenhancing academic performance andchanging att itudes in local communit ies.

FFK raised an enormous £120,000 forHopeHIV in 2009. One of the main areasthat this money wil l fund is supported peereducat ion projects in Botswana, Ugandaand Tanzania.

www.hopeHIV.org

Futures For Kids Registered Charity number 1124171 [email protected] www.futuresforkids.org.uk

Demelza provides hospice care forchildren with l ife-l imit ing condit ions andcurrent ly has approximately 570 childrenand famil ies across London and SouthernEngland who can access their services. Itreceives only a small amount ofgovernment funding and rel ies almostent irely on fundraising to operate.

FFK made a major donation to help fundthe bui lding of a new hospice in SouthEast London expected to init ial ly providecare for an addit ional 180–200 chi ldrenand famil ies.

www.demelza.org.uk

EveryChild. Mil l ions of chi ldren aroundthe world have to cope not just withgrowing up in poverty, but growing upalone, separated from their family ororphaned, abandoned into insti tutionalcare, escaping violence or forced intochild labour – these chi ldren are at theirmost vulnerable. The chari ty fights tokeep chi ldren safe under suchcircumstances either within theircommunity, or through cris is care andsupport.

FFK has already allowed EveryChild tohelp many chi ldren in cris is and to reducethis vulnerabil ity.

www.everychi ld.org.uk

Futures for Kids (FFK) is a registered charity in the UK, but has really been established as a fund raisingmechanism to support charities already operating around the world.

We have chosen three charities to support. Each does fantastic work providing care, support anddevelopment to children in the UK, Africa and globally, helping to provide them with a better future;

To find out more about Futures For Kids join us at the IDX in London June 9/10. In addition to get to knowus you will have a chance to win an ounce of gold and other great prizes kindly donated by the

Swiss Futures and Options Association (SFOA). We will also be present with a stand at the Bürgenstockconference in Interlaken Sept 9–12. We are looking forward to seeing you at those events!


Hope in the gloom?Needless to say, it has not been a good couple of years for the financial services industry. The demise of Bear

Stearns and Lehman Brothers and the near collapse of many other institutions has shaken participants to the

core. According to Bloomberg estimates, more than 277,000 financial services jobs have already gone global-

ly. And with further writedowns expected on corporate loans and hundreds of thousands more redundancies pre-

dicted by management consulting firms, we may not be out of the woods yet.

48

Career

The impact on hiring has been enormous. Almost every majorinvestment bank has imposed a recruitment freeze while itseeks to reduce headcount and redeploy people internally.Whole areas, such as structured credit, which were majorrecruiters in 2005 and 2006, have been wiped out.However, and despite all the gloom, there are bright spots.

Some firms and areas of the industry are hiring. Even in the biginvestment banks, some business areas are exempt from hiringfreezes. And regulatory bodies such as the FSA, FINMA andeven the IMF need to increase their firepower.Here’s where eFinancialCareers sees the bright spots in the

gloom:• Interdealer brokers – Interdealer broking firms such asICAP, Tullett Prebon, Evolution and Cantor Fitzgerald aretaking advantage of banks’ disarray to poach staff and growtheir presence in both equities and fixed income. In March,ICAP hired a team of portfolio traders from UBS andEvolution is hiring a team of 15 for fixed income.

• Deutsche Bank – Deutsche Bank chief executive JosefAckermann has declared his intention to make the most ofpay restrictions at US bankswhich have taken TARPmoney from the government.Deutsche has already hiredseveral senior bankers fromUS rivals.

• Independents and boutiques – Independent investmentbanks and boutique corporate finance houses such asGreenhill, Evercore, Fenchurch and Moelis have all beenscooping up top investment bankers from their major com-petitors. With senior relationship holders looking to escapethe pay constraints of big houses, this trend is likely to con-tinue. Many senior bankers are also setting up boutiques oftheir own.

• Risk – Although risk hiring has been impacted by reducedtrading in structured products, risk remains a key area offocus for investment banks as many seek to build out theirrisk systems. Paula Maidens, director of risk and compliancerecruitment at Robert Walters, says most banks are stillrecruiting in risk, despite having hiring freezes in otherareas.

• Regulators – After failing to spot the financial crisis coming,or to do enough to prevent it, regulators the world over arelooking to improve their capabilities. For example, the UKFinancial Services Authority is hiring 218 people for its teamwhich supervises banks, and is interested in hiring peoplewith risk and compliance backgrounds. The IMF has alsodeclared an intention to hire many as 180 people this year,with particular emphasis on building expertise in financial

sector surveillance, and “surveillance of macro economicand financial sector linkages”. And in Switzerland, Finma,the Swiss markets regulator, is hiring risk managers,lawyers, mathematicians and economists.

• FX and rates – Throughout the financial crisis, banks’ FXand rates divisions have continued to make money. Thisremained the case even at the beleaguered Royal Bank ofScotland in 2008, for example. Although hiring in bothareas is down significantly on pre-crisis levels, recruiters saythere is recognition that some hiring is necessary to maintainmomentum in this area.

• Flow trading – With spreads on many products at recordhighs, there’s money to be made in simple market making.Banks such as Goldman Sachs say the increased profitabili-ty of their flow trading activities is outweighing the disad-vantages of the increased leverage required to meet new reg-ulatory restrictions.

• New entrants – Despite the dire market conditions, there area handful of new (or newish) entrants seeking to take advan-tage of the gloom. These include Royal Bank of Canada,

which is committed to buildingits wealth management presencein London. Chinese bank Citic isalso expected to build an equitiesbusiness in London and NewYork in the second half of 2009.

And China Construction bank set up in London in February2009 with a view to building a foreign exchange business.

• Private Banking – Swiss private banking faces a difficultperiod. The global crackdown on tax havens could clearlyprove damaging to Switzerland’s pre-eminent private bank-ing industry. And the two Swiss global players, UBS andCredit Suisse, are going through a tough transition periodshedding hundreds of jobs. However, private banking hiringisn’t dead. Many Kantonalbanken and Cooperative bankscontinue to extend their sales forces. At the same time, bou-tiques like Wegelin & Co. continue to open new offices.

This article was compiled by SarahButcher, editor of eFinancialCareers, the world’s leading net-work for finance and bankingjobs. For more information visitwww.efinancialcareers.com. Youcan contact Sarah at [email protected]

“Private banking hiringisn’t dead.”

The Globe logo, CME®, Chicago Mercantile Exchange® and CME Group™ are trademarks of Chicago Mercantile Exchange Inc. CBOT® and Chicago Board of Trade® are trademarks of the Board of Trade of the City ofChicago. New York Mercantile Exchange® and NYMEX® are registered trademarks of the New York Mercantile Exchange, Inc. Copyright © 2009 CME Group. All rights reserved.

Where others see peril, Standard Chartered’s Gerrard Katz sees potential. Using the risk management products of CME Group –the world’s largest and most liquid regulated market for foreign exchange – Standard Chartered offers clients fast, credit-efficientaccess to derivatives on emerging market currencies like the Chinese renminbi and Korean won, as well as major currenciesincluding the euro, yen and pound. With unparalleled liquidity, transparencyand speed, and the security of central counterparty clearing, CME Group guar-antees the soundness of every trade. That’s why CME Group is where the worldcomes to manage risk. Learn more at cmegroup.com/fx.

GERRARD KATZ

Head of FXTrading, North East Asia,Standard Chartered Bank

Never let riskrestrain your potential.


Structured Investment ProductsReview and Outlook: LessonsLearned from the Financial CrisisThe structured investment products industry has been facing headwinds throughout 2008. Still, the structured

products holdings in Swiss bank custody accounts are stable and prove the investors’ confidence in these

instruments. Nevertheless, the industry has learned its lesson from the financial turmoil and has started ini-

tiatives to reestablish confidence and accelerate the industry’s recovery.

50

StructuredProducts

2008 was quite a challenging year for the structured investmentproducts industry: The financial turmoil with value destructionamong all asset classes and the Lehman case created a climateof insecurity and distrust among investors. This lead to a slow-down in trading activity mostly visible in the turnover of struc-tured investment products listed at Scoach. Nevertheless, therecent developments in the structured products holdings inSwiss bank custody accounts suggest a confident outlook. Infact, for the month ending in January 2009 the holdings ofstructured products in Swiss bank custody accounts amount to254 Bio. SFr. This corresponds to a share of wallet of 6.61%,which keeps being stable despite industry headwinds over thelast 18 months. This figure suggests that investors are still con-vinced in the compelling advantages of structured investmentproducts and it indicates a promising outlook about futuredevelopments in terms of industry growth.

Structured Products Holdings Stable and Slightly Increasing

Source: Swiss National Bank, Monthly Statistical Bulletin, March 2009

Nevertheless, the industry has learned its lesson after the finan-cial turmoil. The SSPA is about to introduce two major initia-tives to restore the investors confidence and to boost industrygrowth: A general risk classification and a European catego-rization model.

Greater transparency thanks to risk classificationThe SSPA will shortly introduce a comprehensive and easilyapplicable risk classification system based on value at risk.Value at risk is a widely used measure of financial assets withinfinancial mathematics and financial risk management,. Value atrisk measures the worst expected loss under normal market con-ditions over a specific time interval at a given confidence level.The calculation of the risk measure used by the SSPA is

based on historical simulation. In this approach, the value atrisk is estimated by creating a hypothetical time series ofreturns on a specific instrument or portfolio, obtained by run-ning the instrument through historical data and computing thechanges that would have occurred in each period.

The calculation of value at risk allows to cluster the struc-tured investment products universe into distinct risk categories.The SSPA has defined 6 of them, which are based on tradition-al portfolio management and range from fixed income togrowth (cf. table below). The sixth category corresponds to aninvestment in leverage products and has been defined to con-sider a 100% investment in options. According to changes invalue at risk, a product can change risk category during its life-time. Value at risk therefore is a dynamic number and is calcu-lated continuously for every single product.It is intended that, in the future, these new classifications will

be listed on custody account statements and also be incorporat-ed in investment advisory services. Thanks to this risk classifi-cations for structured investment products the SSPA will achieveone of its key objectives.

Categorization modelRisk category Risk profile Strategy

1 low fixed income

2 moderate income oriented

3 medium balanced

4 enhanced capital gains oriented

5 high equities

6 very high options

Source: SSPA, April 2009

European categorization modelDemystifying structured investment products starts with notconfusing the investor with an array of acronyms and compet-itive marketing names. Hence, the SSPA worked to come upwith generic product names. The result was the so called SwissDerivative Map which will further help to increase the com-prehension and the acceptance of structured investment prod-ucts among the investors’ community.The European industry association – now operating under

the name of EUSIPA (European Structured Investment ProductsAssociation) – has decided to adopt large parts of the SSPAclassification model. This means that a common classificationsystem is established as the standard throughout Europe.

Continued on page 41

Roger Studer, President SwissStructured Products Association

400

350

300

250

200

150

100

50

0

Structured products holdings in bank custody accounts in bio. SFr. Share of structured products in %

8%

7%

6%

5%

4%

3%

2%

1%

0%Mrz. 05 Aug. 05 Jan. 06 Jun. 06 Nov. 06 Apr. 07 Sep. 07 Feb. 08 Jul. 08 Dez. 08


From a legal point of view, structured products are debenturessecured against all the assets of the issuer (i.e. the debtor). Instructured products, the creditworthiness of the issuer is there-fore crucial. Post Lehman, we’ve seen the dawning of the coun-terparty risk. Prior to that it was unthinkable in a generationthat a major bank such as Lehman would fail.There are several possibilities how to reduce the issuer risk of

a structured product. One is to diversify the investment by buy-ing certificates of different issuers. Another alternative are socalled collateralized certificates. At the initiative of ScoachSwitzerland and the Swiss Structured Products Association,SSPA, an innovative service has been developed to minimiseissuer risk by means of collateral security. The new service willbe offered by SIX Swiss Exchange Ltd and is rooted in the tried-and-trusted securities lending infrastructure of SIX SIS Ltd andEurex Zurich Ltd. Collateral security functions via a sophisti-cated collateralisation mechanism which factors in an impartialvaluation of the individual structured product, independent ofthe issuer. In the Swiss market, Bank Vontobel has been one ofthe first providers of these new products since spring 2009.

The collateralization: easy and effectiveCollateralized certificates eliminate the issuer risk through thedeposit of a pledge in the form of high quality securities. Thenew scheme has been in development since the end ofNovember and uses the existing lending infrastructure ofScoach’s parent group, Six Group, and Eurex Zurich. Themechanism is effective and comprehensible. The following dia-gram illustrates the collateralization process.

The issuer deposits securities according to the nominal value ofoutstanding certificates in the security pool of the securitiesservices SIX SIS. If an issuer is no longer able to provide suffi-cient collateral for its structured product at the current marketvalue, the previously deposited securities serve as realizablesurety in favor of the investors. This easy and efficient mecha-

nism accordingly protects investors against issuer risks relatedto structured products investments.

Securities are adjusted on a daily basisSIX Swiss Exchange accepts several categories of high-qualitysecurities as well as cash as collateral. They include repo secu-rities of the Swiss National Bank and the European CentralBank. Furthermore, SIX Swiss Exchange accepts stocks that arerepresented in the Swiss Market Expanded Index.The higher the quality of the securities, the lower the hair-

cut, which represents an additional security margin and takesinto account possible price swings in the respective securities.The exact valuation of the securities is calculated on a dailybasis. It corresponds to the number of outstanding certificatesmultiplied by their fair price.The relevant fair price is the average of the mid price calcu-

lated by two independent external price sources. In the casewhere the quote of the issuer is the highest of the three, it willbe the one used to calculate the collateral.The issuer is responsible for buying or selling the securities

and making sure that the collateral corresponds to the nominalvalue of the outstanding certificates. Management of thesesecurities on a daily basis is associated with costs. Additionalfees charged by the securities services of SIX SIS accordinglymake collateralized securities more expensive than certificateswithout collateralization.

A market view is still requiredIn the event of insolvency of the issuer, the mechanism of thecollateral becomes effective and investors are protected againstissuer risk. Nevertheless, risks related to other external factors,i.e. market risks such as price swings, are not eliminatedthrough the collateralization. Collateralization is not the sameas a capital protection feature.Accordingly, investors must have a market view before

investing in the respective certificate and make sure they clear-ly understand how the respective product works.The mechanism of collateralization of structured products

such as presented by SIX Swiss Exchange is unique in Europe.Once again, structured products demonstrate their flexibility andbenefits especially with regard to all types of investment risk.

StructuredProducts

51

Collateralized CertificatesMinimize Issuer RiskThe issuer risk of structured products was not a topic of discussion for a long time. It was not much of a con-

cern for private investors. The situation changed abruptly following the Lehman case and investors have been

forced to test their assumptions. Solutions to reduce counterparty risk related to structured product invest-

ments are coming from the derivatives business itself. Swiss structured product providers are now able to col-

lateralize the certificates that they trade on Scoach, the national exchange.

Georg von Wattenwyl, GlobalHead Advisory & Distribution,Financial Products, Bank VontobelAG, Zurich

Collateral

… invests in certificateslisted at Scoach

Buy/sellMarketmaking

Daily valuation of thecollateral and the

certificates at fair prices

Custodianship ofthe collateral

Management of thecollateral by the issuer

Sale of the collateral in favor ofthe investor in case of insolvency

Source: SIX Swiss Exchange

Investor Issuer


52

Agenda

List of events

Editorial OutlookIssue 41 Autumn 2009Published November 2009Focus CommoditiesSpecial Review of the 30th International Bürgenstock Meeting

in InterlakenDistribution FIA International Derivatives Conference in ChicagoSubmission for advertising and editorial: 2 October 2009

June 2009June 9–10 FOA / FIA FIA/FOA International Derivatives Expo London

http://www.idw.org.uk/June 16–18 ICBI GAIM 2008 Monaco

http://www.icbi-events.com/r.php?uID=3607June 23 RISK 2nd Annual Derivatives Summit London

ttp://www.derivativessummit.com

July 2009July 2–3 Paris International Financial Forum Paris

Europlace http://www.paris-europlace.net/events.htm

September 2009Sept 9–12 SFOA 30th Intl Bürgenstock Meeting Interlaken

in Interlaken http://sfoa.org

October 2009Oct 20–22 FIA 25 FIA Futures & Options Expo Chicago

http://www.futuresindustry.org/conferences.asp

November 2009Nov 17–19 Global Global Grain 2009 Geneva

Commodities [email protected]

December 2009Dec 1–2 FESE FESE Convention 2009 Brussels

http://www.fese.eu


Organisations

53What are the causes of the crisis? What reforms should beundertaken to build a new financial order? What responsibili-ties have the professionals of finance, governments andinvestors? A dozen high-level roundtables animated by nearlyfifty international experts gathered more than 250 participants,among which delegates from over forty international federa-tions and national associations representing close to 500,000independent financial advisors in more than 15 countries.While the policy makers are eager to regulate even more

strictly the financial markets in response to this unprecedentedcrisis, CIFA’s vice-chairman Jean-Pierre Diserens declared: “Wedon’t need more regulation, we need better regulation!” Theregulatory pressure has indeed been widely increased in the lastdecade, putting a heavy weight on the financial sector withoutproving effective in preventing the crisis. Controls in the fieldof money laundering and terror financing haven’t proved moreeffective, said the speakers of the first module of the Forum.Professor Xavier Raufer from the Department of Research onContemporary Criminal Threats at the University of Paris IItalked about the “paper cathedrals” built by the administra-tions, which proved totally ineffective in combating financialcrime. “Money laundering today is easier than ever”, said theprofessor.Why has this crisis not been foreseen, despite the numerous

public and private institutions scrutinizing the evolution of themarkets? The role and responsibility of the analysts, the super-visory authorities and the financial professionals were debatedin the second module of the conference. Patrice Robineau,Senior Advisor to the Executive Secretary of the UnitedNations’ Economic Commission for Europe, pointed amongthe various factors of this crisis to an excess of confidence anda tendency of the political Elites to remain blind to certainfacts. “The warnings issued by the UNCTAD or the FinancialStability Forum have been ignored”, he said.This crisis was mainly caused by a series of bad political

decisions since the 1990s, according to Adrian Blundell-Wignal, Deputy Director of the Directorate for Financial andEnterprise Affairs of the OECD. He stigmatized the disman-tling in the US of legislation inherited from the 1930’s crisis andbashed the Basel II Accords as “one of the greatest blunder inthe history of regulation”. The lack of transparency and a sys-temic information deficit in the financial sector were yet otherdriving forces of the crisis, said Philippe Dessertine, Head ofthe Institute of High Finance in Paris.An information deficit is also to be addressed regarding the

consumer investors as well as the financial professionalsthrough proper education, as was discussed in a panel overinformation and responsibilities of the investors, duties of thefinancial advisors and responsibilities of the public authorities.

As a collateral effect to this crisis, the growing mistrust offinancial consumers and investors towards banks largely bene-fited the independent financial advisors, as various panelistsobserved. David Bennett, Chief Executive of the Association ofPrivate Client Investment Managers and Stockbrokers(APCIMS) in London, confirmed a 10% to 25% increase of thefunds under management of his members. “The clients are des-perate for professionals who can protect them against largefinancial entities”, said Leong Sze Hian, President of theSociety of Financial Service Professionals (FSP) in Singapore. InSwitzerland, noted Olivier Collombin, director at the privatebank Lombard Odier in Geneva, the independents could dou-ble their market share from 15% to 30% within the next fiveyears.

The crisis and mistrust towardsbanks benefit the independentfinancial advisorsDubbed the “Davos of financial advisors”, the International Forum of the Geneva-based CIFA (Convention of

Independent Financial Advisors), the only financial NGO in consultative status with the Economic and Social

Council of the United Nations, held its seventh edition in Paris from April 27 to 29 under the theme “Recurring

financial jolts and crises”, addressing the most pressing questions of the current financial crisis.

CIFA, a Swiss non-profit foundation, was created in2001 to reinforce the role of independent financial inter-mediaries at the international level in order to betterdefend the interest of investors. Its international forum,which has become a must annual meeting for financialadvisors in Europe and overseas, was held already fivetimes in Geneva (2003–2007) and last year in Prague. Forits VIIth International Forum in Paris, the CIFA chose thefollowing theme many months before last year’s financialscandals: “Recurring financial jolts & crises – advancewarning signs of a new economic world order”.

Paul-André Jacot, President and CEO of SFOA, announcingthe 30th Bürgenstock Meeting. Standing at right isJean-Pierre Diserens, Vice Chairman and Executive VicePresident of CIFA.


Paul-André Jacotinducted into the FuturesHall of FameAt their 2009 awards ceremony, the Futures Industry Association (FIA) inducted 21 new members into the

Futures Hall of Fame, among them SFOA President and CEO, Paul-André Jacot. Since its inception four years

ago, the Futures Hall of Fame has honored the accomplishments and contributions of 74 remarkable individu-

als from around the world. These inductees have earned the respect and gratitude of participants in the glob-

al futures and options markets for laying the foundation for the extraordinary success of the industry.

54

Paul Jacot holds a unique place in the history of futures andoptions trading in Europe. As the chairman of the Swiss Futuresand Options Association from 1990 to 2001, he presided over an

important component of our industry at a time of extraordinary changeand growth. Thanks to his leadership and extensive network of contactsin banking and international commodity trading, the SFOA’s annualfall meeting grew to become an important international gathering ofexchange leaders, market participants and government officials in thefutures and options markets. The discussions and decisions inspiredby the Bürgenstock conference deserve no small share of the creditfor the tremendous advance of European derivatives exchanges duringthis period of time. Jacot continues to be a member of SFOA todayand is currently serving as its president and chief executive officer. Healso co-founded and served as the first editor in charge of the SwissDerivatives Review, and for many years he was a prominent member ofthe International Finance and Commodities Institute.

tidf tleaders,exchange

grewmeetingfallinandbankingin

Thangrowth.andcomponimportantOptionand

traoptionshJacotaulP

ddi iThk tgovernandparticipantsmarket,internimportantanbecometo

tradingcommoditynternationalextensandleadershiphistonks

oimea tatindustryourofonent20to1990fromAssociationns

chairmatheAsEurope.inadinghistotheinplaceniquea uholds

i i dd i idtheinofficialsnmentofgatheringnational

annualSFOA’stheg,contactsofnetworksivechangeextraordinaryof

anoverpresidedhe001,FuturesSwisstheofan

andfuturesofory

InternationaltheReviewDerivatives

anco-foundedalsosecurrentlyisand

timeofperiodthistremendoutheforBürgenstoctheby

optionandfutures

Institute.CommoditiesandFinancea pwasheyearsmanyfornd, aw

cineditorfirsttheasservedandchiefandpresidentitsaserving

emba mbetocontinuesJacotme.derivatiEuropeanofadvanceus

smallnodeserveconferenceckanddiscussionsThemarkets.ns

stitute.ofmemberrominentp

SwisstheofchargeHeofficer.executivef

todaySFOAofmberduringexchangesives

credittheofshareinspireddecisionsd

People

NYSE Liffe is the brand name of the derivatives business of NYSE Euronext, comprising the derivatives markets in Amsterdam, Brussels, Lisbon, London and Paris; and the futures markets in the U.S. This notice isfor informational purposes only and does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction. Those wishing either to trade in anyproducts available at NYSE Liffe or to offer and sell them to others should consider both their legal and regulatory position in the relevant jurisdiction and the risks associated with such products before doing so.Potential users of NYSE Liffe contracts should familiarise themselves with the full contract specification of the product concerned and any associated information. Bclear is operated as a clearing service by LIFFEAdministration and Management, which is regulated by the Financial Services Authority as a Recognised Investment Exchange. Those wishing to use NYSE Liffe’s wholesale services should consider their regulatoryposition in the relevant jurisdiction before doing so. The Bclear service is currently not available to United States persons, with the exception of certain options based on UK stocks and the FTSE 100 Index.Potential users should refer to the Statement at www.nyx.com/cds which draws their attention to the particular characteristics associated with the contract. Markit® and iTraxx® are registered trademarks ofInternational Index Company Limited / Markit Group Limited and have been licensed for use by LIFFE Administration and Management. International Index Company Limited / Markit Group Limited do not approve,endorse or recommend NYSE Liffe’s Credit Default Swap Index Contracts. 5363

CDS on Bclear - now live. The safer, clearer route for OTC.You can now process and clear your OTC Credit Default Swap business on NYSE Liffe’s provenOTC derivatives service, Bclear.

Bclear helps you reduce operational risk and manage counterparty risk, as well as enjoy greatercapital efficiency through position netting your trades.

Based upon the Markit iTraxx Europe indices, CDS on Bclear safeguards the flexible aspectsof OTC trading such as anonymity and pre-negotiation. Furthermore, it is available to a widerrange of customers.

If you want the benefits of OTC transactions with the added security and confidence thatNYSE Liffe provides, choose Bclear.

To find out more:

+44 (0)20 7379 [email protected]/cds

swiss review derivatives - · pdf fileresume.inspiteofthis,wewill ... mr. jignesh shah, vice...

Documents