Financial Innovation in a Distressed Economy. John W. Labuszewski April 2009. Disclaimer.
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CME Group’s history of innovation
Seven traditional new futures product criteria
Demutualization focused exchanges on profit motive
CME demutualized in 2000 and issued an IPO in 2002
The trend towards “for profit” is almost universal amongst exchanges
Commodity Futures Modernization Act (CFMA) of 2000
Allows exchanges to “certify” non-controversial new products .. does not absolve exchanges of internal due diligence process … but nonetheless facilitates speed to market
Alternate regulatory environments created … DTEF, EBOT, Security Futures Products (SFPs)
What has Changed?
3. Electronic trading alters new product paradigm
Exchanges exist to allocate access to trading process … exchanges sold memberships to allocate access to physically confined pits … electronic trading tremendously enhances global distribution
Pit traded contracts must immediately attract “critical mass” of outside order flow to support locals … or perish
CME Globex® altered new product paradigm, extending “shelf-life”
Financial crisis underscores value of centralized clearing
Counterparty credit risk is major concern … CME Clearing offers unparalleled financial sureties
CME Group historically offered vertically integrated execution and clearing services … but clearing services may be “unbundled”
Building on futures business, CME Group offering clearing services in OTC arena
What has Changed?