International Developments in Futures and Options Maia Manock Thomas Graf

How They Came To Be… 13 th /14 th Century: Wool purchases in Europe 13 th /14 th Century: Wool purchases in Europe 1730s: Doijma Rice Exchange in Japan 1730s: Doijma Rice Exchange in Japan 1972: CME established IMM 1972: CME established IMM International exchanges International exchanges modeled after CME International Exchanges International Exchanges create opportunities

Growth of Futures/Options Figure 1

Major Players: Who? Over 75 Exchanges Over 75 Exchanges List of Exchanges List of Exchanges List of Exchanges List of Exchanges We will focus on LIFFE, Euronext and TFX We will focus on LIFFE, Euronext and TFX

Exchange Mergers Three of the largest in the United States all merged in about one year: Three of the largest in the United States all merged in about one year: Chicago Board of Trade merged with Chicago Mercantile Exchange in July Chicago Board of Trade merged with Chicago Mercantile Exchange in July In August 2008 these two merged with the parent company of NYMEX In August 2008 these two merged with the parent company of NYMEX Now are all under the “CME Group” Now are all under the “CME Group” LIFFE bought out by NYSE Euronext, who owns the NYSE LIFFE bought out by NYSE Euronext, who owns the NYSE All these mergers have yet to cause any significant problems All these mergers have yet to cause any significant problems However, is massive consolidation of these exchanges a good thing? However, is massive consolidation of these exchanges a good thing?

Same Future, Different Exchange Exchanges are starting to offer products usually traded on other exchanges Exchanges are starting to offer products usually traded on other exchanges Dubai Gold and Commodities Exchange Dubai Gold and Commodities Exchange Started offering oil futures normally found on NYMEX Started offering oil futures normally found on NYMEX Only sold 3,000 on the first day Only sold 3,000 on the first day Chinese Exchanges Chinese Exchanges Starting to offer a wide variety of products, many native Starting to offer a wide variety of products, many native Corn, cotton, and soybean Corn, cotton, and soybean Wealth no longer created half a world away Wealth no longer created half a world away

Future Futures Electronic trading platforms making international trading easier & more commodities to be traded Electronic trading platforms making international trading easier & more commodities to be traded Some products slow to be offered as futures Some products slow to be offered as futures Steel only was offered in 2007 after being crucial for 150 years! Steel only was offered in 2007 after being crucial for 150 years! New derivatives (new space-age metals, renewable energy, carbon credits, etc.) New derivatives (new space-age metals, renewable energy, carbon credits, etc.) Who can think of some that might also appear soon on markets worldwide? Who can think of some that might also appear soon on markets worldwide?

Tokyo Financial Exchange 1989: TIFFE established 1989: TIFFE established What does TFX offer? What does TFX offer? TFX has 208 members TFX has 208 members 1991: Electronic trading system like LIFFE 1991: Electronic trading system like LIFFE 2005: Memorandum of Understanding 2005: Memorandum of Understanding 2007: Lengthening of trading hours 2007: Lengthening of trading hours 2007: Two overnight interest rate futures 2007: Two overnight interest rate futures

TFX Major focus of TFX has been Euroyen futures and Yen related interest rate derivatives Major focus of TFX has been Euroyen futures and Yen related interest rate derivatives Renamed from TIFFE to TFX in 2005 Renamed from TIFFE to TFX in 2005

Crude Oil Futures One of the most watched futures internationally One of the most watched futures internationally Sold in barrels Sold in barrels Current price: $40.15 (3/2/09, NYMEX) Current price: $40.15 (3/2/09, NYMEX) High Price: $146 in late July 2008 High Price: $146 in late July 2008 What role did speculators play in the price fluctuations? Who is responsible? What role did speculators play in the price fluctuations? Who is responsible? If new laws in the U.S. are passed, this will effect trading worldwide on NYMEX If new laws in the U.S. are passed, this will effect trading worldwide on NYMEX

Crude Oil Futures Price Chart

How responsible are speculators? Nicknamed the “Enron Loophole” Nicknamed the “Enron Loophole” Allows traders to electronically deal in energy without ever intending to take possession of it Allows traders to electronically deal in energy without ever intending to take possession of it What’s to stop them from affecting other forms of energy? What’s to stop them from affecting other forms of energy? Obama Administration has pledged to close this loophole Obama Administration has pledged to close this loophole Some argue speculators inflated the price by $80, some say at most $4. What speculators did can only been done on Energy futures

LIFFE 1982: LIFFE created 1982: LIFFE created 1993: LIFFE merged with LTOM 1993: LIFFE merged with LTOM 1996: LIFFE became Europe’s biggest futures exchange 1996: LIFFE became Europe’s biggest futures exchange BUT the DTB had more efficient technology BUT the DTB had more efficient technology By 1998: LIFFE lost market power By 1998: LIFFE lost market power

LIFFE 1998: LIFFE CONNECT created and power revived 1998: LIFFE CONNECT created and power revived Then in 2002: Bought out by Euronext Then in 2002: Bought out by Euronext WHY??? WHY??? London Stock Exchange offered more! London Stock Exchange offered more! What about the London Clearing House? 2003: Clearnet + LCH = LCH.Clearnet What about the London Clearing House? 2003: Clearnet + LCH = LCH.Clearnet Euronext Website Euronext Website Euronext Website Euronext Website

Summary Forms of futures and options have been around for hundreds of years Forms of futures and options have been around for hundreds of years Currently there are dozens of exchanges worldwide operating 24/7 Currently there are dozens of exchanges worldwide operating 24/7 There is movement towards electronic exchanges, linking the world together There is movement towards electronic exchanges, linking the world together Speculators were seemingly able to manipulate the market with crude oil with worldwide ramifications Speculators were seemingly able to manipulate the market with crude oil with worldwide ramifications Exchanges are merging at a fast rate, now parent companies often control multiple locations often in different countries Exchanges are merging at a fast rate, now parent companies often control multiple locations often in different countries

Questions?

Class Quiz!

Which of the following is not a reason why Euronext was able to obtain LIFFE? A) Keep current management B) Keep its current location in London C) They offered more money than the London Stock Exchange

Which of the following is not a reason why Euronext was able to obtain LIFFE? A) Keep current management B) Keep its current location in London C) They offered more money than the London Stock Exchange

What is the difference in price of an oil future today compared to late July 2008? A) $40 B) $70 C) $100 D) $140

What is the difference in price of an oil future today compared to late July 2008? A) $40 B) $70 C) $100 D) $140

What is the value of derivatives exchanged daily on NYSE Euronext? A) $2 million B) $2 billion C) $2 trillion D) $2 zillion

What is the value of derivatives exchanged daily on NYSE Euronext? A) $2 million B) $2 billion C) $2 trillion D) $2 zillion

The Enron Loophole allows speculators to do what? A) Trade in larger quantities than others B) Trade electronically with no intention of receiving the item C) Conduct insider trading on Energy futures D) Have barrels of oil delivered for a discount and then resell them at a profit

The Enron Loophole allows speculators to do what? A) Trade in larger quantities than others B) Trade electronically with no intention of receiving the item C) Conduct insider trading on Energy futures D) Have barrels of oil delivered for a discount and then resell them at a profit

When Euronext bought out LIFFE their clearinghouses merged to become… A) LCH.Clearnet B) Liffe.Euronext C) London Clearinghouse D) EuroLondon CH

When Euronext bought out LIFFE their clearinghouses merged to become… A) LCH.Clearnet B) Liffe.Euronext C) London Clearinghouse D) EuroLondon CH