Viewpoint – Boca highlights resilience, risk management and technology

Themes from this year's conference show the promise of derivatives markets

24 March 2023


Last week’s FIA Boca conference was a resounding success on many levels. With the resort’s renovations largely complete, we can now experience the five-star vision that Michael Dell and his fellow investors have in store for the property. I’m thrilled FIA has a long-term partnership with the resort, and I look forward to celebrating our 50th Boca with them in 2025.

But as the dust settles from last week, I want to highlight several observations and themes that emerged from the conference.

The first is our industry’s strong commitment to resilience. My Boca opening remarks focused on this theme, citing past and current crises as the impetus for improvements and change. But with the ink barely dry on the recent ION Markets cyber incident, our industry was on to the next crisis with the extreme volatility caused by the failure of Silicon Valley Bank (SVB) during the conference. .

The good news is our markets were made for such volatility. Businesses immediately turned to the futures markets to hedge their risks. CME Group and Intercontinental Exchange both reported record volumes of trading on the Monday of Boca.

It is at times like these that the futures markets show their strength. During periods of stress, they provide the tools that people need to manage their risks, and the clearing system ensures that the markets are buffered from the fear of default. Our markets are designed to be resilient, and that core principle was on display all throughout the Boca week.

That said, we cannot rest on our laurels. As an industry, we need to make sure that we continually invest in technology and capacity to handle the massive flow of transactions on days like these. The vast majority of the workflow is already extremely efficient, but there is always room for improvement. Here's one example:  the development of standards through efforts like the Derivatives Markets Institute for Standards (DMIST).  DMIST will help us make sure that every part of the trading process can be scaled up for the next wave of record volume, and the next one after that.

Another major theme at Boca was the importance of hedging. It appears that one reason for SVB's collapse was that the bank stopped hedging its interest rate risk. As the Wall Street Journal and the Financial Times have reported, the bank did have hedges in place at the start of 2022, but over the course of the year decided to unwind those positions. In the short term, that allowed the bank to book some profits. But as it turned out, the lack of protection contributed to the collapse.

This story is not new. In 2007, when oil prices skyrocketed, Southwest Airlines was able to protect its bottom line through an astute hedge on jet fuel prices. Meanwhile, other airlines were faced with a massive increase in their operational costs because they had sold off their hedges to save money. For Southwest, the protection provided by those hedges created a meaningful advantage in their ability to compete.

There is an opportunity here to educate more businesses about the importance of hedging—in good times and bad. There are sure to be more moments like these, and or markets will be there to serve the risk-management needs of the global economy.

The final theme coming from Boca was technology. Two trends in particular jumped out to me. First, the pervasiveness of cloud technology. Four of the largest exchanges in the world – CME Group, Deutsche Boerse, London Stock Exchange Group, and Nasdaq – have formed partnerships with the technology companies that dominate cloud computing. Their partnerships are based on the recognition that exchanges generate a vast amount of data, and moving that data to the cloud environment opens up tremendous potential for using artificial intelligence to mine that data for insights. All four of those exchanges were represented on our exchange leaders panel, and they all emphasized how important these partnerships are for growth and innovation.

This year’s Boca also saw a maturing of the digital assets space. A year ago, everyone seemed to be captivated by crypto. But this year, the discussions were much more about integrating with traditional finance.

I am confident that the technology promise of digital assets will be realized sooner or later, but judging by the conversations I witnessed at Boca, the focus right now is on practical use cases. For example, several leading firms in the industry are exploring ways to tokenize the movement of collateral. There are huge amounts of cash and securities moving through the clearing system every day, and anything that can take  friction out of that process would have tremendous benefits. In my view, these types of practical use cases will be the gamechanger that we have been discussing for several years.

I started my Boca remarks by confessing that 2022 seemed like a "dog year" with so many changes and disruptions occurring over the year. This year may be off to a similar start. However, I am optimistic that the industry is well positioned to improve its resilience and growth trajectory. Hold on tight!

Highlights from Boca

  • MarketVoice
  • News & Commentary
  • Viewpoint