Global Issues On Agenda At Annual FIA Conference

The hot topics at the 1990 Futures Industry Association annual conference held in Boca Raton earlier this month were electronic trading, the globalization of the futures markets and the battle between the Commodity Futures Trading Commission and the Securities and Exchange Commission for jurisdiction over the pits.

In the forefront was the recently-tendered resignation of the Chicago Mercantile Exchange's chairman, Leo Melamed. Known as a strong and capable lobbyist in Washington, Melamed is also credited with pioneering foreign currency contracts during his 20-year tenure with the CME.

The Globex-Aurora unification talks, which held out the hope of standardized global access to automated futures markets, appear to have hit a snag. The talks have been on since last spring, but official statements from both Melamed and Chicago Board of Trade chairman Karsten "Cash" Mahlmann indicate that unification may be too much to expect.

The talks between the CME and the CBOT are progressing, according to Melamed, who says: "There is a way to link the two systems. We have already begun to see it. We don't have the full answer yet." He says talks between the technical staffs of the two exchanges and Reuters Holdings PLC, the CME's partner in the Globex project, will probably wind down in about 60 days and "we should see some end in about 90 days."

During a press luncheon, Melamed told reporters he is committed to seeing Globex launched before he retires at the end of this year. Globex is scheduled to be rolled out in mid-1990.

Karsten Mahlmann, chairman of the CBOT, says "our discussions should come to a fruitful ending" before Melamed leaves office. The two systems can be made to work together and "that's what we want."

Reading between the lines of these official statements, it appears that the CME and the CBOT no longer hope to develop a "single, unified" system, as the two exchanges said last May when they announced the joint discussions. Instead, they seem to have shifted their sights to a combination, or linkage, of the two very different systems.

Melamed says the talks between the CME and Japan are continuing and some progress has been made toward getting Globex terminals installed in Japan. He expressed confusion about the difference between a trader in Japan entering an order via a terminal or via a telephone line.

CME officials have let U.S. Treasury officials know how important entrance to the Japanese dealing community is in order for the U.S. futures markets to remain competitive. But Japan isn't the only country whose regulatory posture may pose problems for Globex.

An international panel on cross-border trading agreed that cross-border regulation needs to be addressed. Gerard Pfauwadel, president of the Marche a Terme International de France, thinks cross-exchange trading is important in order to keep competition alive. The MATIF joined the Globex system "because it is a way to sell our product abroad," he says.

But Pfauwadel warns: "America is one of the most regulated countries in the industry. It is probably not wise for the rest of the world to just copy what this country has."

William Albrecht, commissioner of the CFTC, says regulatory harmonization is a real concern for futures industry regulators. "Each nation's system is different, we realize that. The CFTC hopes to be successful at the international level."

Sources say regulators are concerned about how to determine which jurisdiction applies with cross-border trading, especially with a screen-based system like Globex. Also of concern to foreign regulators is the technological integrity of screen-based trading systems and assurances of uninterrupted service.

However, says Albrecht, the jurisdictional battle between the CFTC and the SEC needs to be resolved "before we can deal with international regulators."

And the battle is heating up. Citing increased volatility in the stock and stock index futures markets and the Federal Bureau of Investigation's uncovering of alleged fraudulent practices in the pits, SEC chairman Richard Breeden is calling for regulation of futures to go to the SEC.

With the visible backing of U.S. Treasury Secretary Nicholas Brady, many feel that Breeden will at least get authority to govern stock index futures trading. But Breeden is pushing for control over the whole commodity futures industry, taking authority away from CFTC Chairman Wendy Gramm who is up for reappointment next month.

Gramm says she is willing to discuss the sharing or transferring of some power to the SEC, but she reportedly says complete SEC jurisdiction or merging the two agencies will impair investors' ability to easily hedge positions. The SEC has complained that the margin requirements for stock index futures, which are set by the exchanges, are too low and promote excessive speculation.

According to U.S. Representative Glenn English, the SEC wants to take over the CFTC "because the futures industry is a growing industry with a lot of potential."

The CME's Melamed says the futures industry does not want to give up regulatory authority over stock index futures without "some kind of quid pro quo." For example, it might allow futures and options exchanges to concurrently list index participation products, if the SEC relinquished its power to veto new stock index futures submitted to the CFTC for approval.

"In the coming year, the future of this industry will largely be written in Washington, not Chicago or New York," says Gramm.