Opening remarks of Walt Lukken, President and CEO of FIA, at the International Derivatives Expo conference in London. As prepared for delivery.
Welcome to IDX! I'm SO excited to be back in London.
Time flies when you are having fun—or hibernating during Covid. Incredibly, this year marks my 10th anniversary at FIA, which means I only have 60 years to go to catch up with the Queen. In all sincerity, it was wonderful to arrive in London during the Queen’s Jubilee and mark her amazing 70 years on the throne.
I also want to recognize another historical note for FIA—I want to welcome Alicia Crighton as FIA’s new chair and our first female in that role. We congratulate Alicia for taking on this well-deserved leadership position.
As we gather back at the Brewery, we are painfully reminded that the world remains a dangerous and unpredictable place. Today, we stand in solidarity with the people of Ukraine and pray for a swift end to this unjust conflict.
It’s hard to remember a time with so much global uncertainty and political unrest. Not that long ago, many believed we could outsmart or out-engineer the economic cycles that brought hardship and political upheavals to society.
Some thought that globalization would create a world where borders mattered less, and where goods, services and capital could flow efficiently around the globe. At the start of the millennium, money was cheap, inflation seemed permanently at bay, and political risk was an afterthought.
Boy, have times changed.
In just three years, we have experienced a pandemic that shut down the global economy, a messy political divorce in Europe, the largest military invasion since World War II, and the highest levels of inflation since Margaret Thatcher, Helmut Kohl, and Ronald Reagan were on the world stage.
Globalization has fallen out of favor and been replaced with discussions of “strategic autonomy” and “supply chain insourcing.” It turns out that politics and borders still matter after all.
What does this mean for our industry? Well, the good news is that uncertainty is the fuel that drives the engine of our markets. During times of volatility, businesses need our markets to manage risk and discover prices more than ever.
Just look at the numbers for proof. Based on the latest FIA data, we are plotting yet another record year for exchange traded derivatives volumes. And equally important, our markets continue to prove resilient during this surge.
So despite the dire headlines and uncertainty, I remain bullish about our markets. Stepping back for a moment, there are significant trends that should prove favorable for our industry for years to come if we recognize and capture these opportunities.
Those areas of growth are commodities, sustainable products and digital assets.
Let’s start with commodities.
It’s hard to believe we are discussing another commodity super-cycle. I am reminded of the last one before the 2008 financial crisis when we saw oil prices above $145 a barrel. That super-cycle was driven by growing Chinese demand, easy money, and theories of peak oil.
Today we are seeing the development of another super-cycle. However, this time it is principally driven by our transition to a carbon-neutral economy as well as short-term issues like supply-chain bottlenecks, rising inflation, and political conflicts.
Economist Michael Haigh of Soc Gen will speak more about these commodity market trends on Wednesday. But the bottom line is this: a commodities super-cycle will bring more participants and more volume to our markets as a new generation of businesses seek to manage this commodity price risk.
And we are not talking about a couple of years. This trend may play out over decades—decades in which exchange traded derivatives will be used to hedge risk and move us from a carbon-intense economy to a carbon neutral one.
During this transition, we can’t underestimate the power of price discovery in our markets. The global benchmarks discovered on our exchanges are strong incentives for entrepreneurs to invest and innovators to create.
There is an adage that the cure for high prices is high prices. That is because the economic pain brought by elevated prices is a powerful motivator that leads to innovation, investment, and radical changes in behavior. There is a reason that $145 a barrel oil in 2008 led to the launch of companies like Tesla, greater investments in renewables and yes, innovative ways to produce traditional energy.
In the coming years, price signals from our markets will be as powerful as any government action in guiding market forces to a greener economy.
One note of caution, however. Economic cycles do not always align with political ones. Undoubtedly, high prices will lead to disgruntled voters and politicians. The pain of high commodity prices is real to average citizens and should not be trivialized. During such times, our markets have become the target of that angst. Remember the London Loophole and Blame the Speculators movement from the last commodity super-cycle? I certainly do!
As food and energy prices increase, we will see more political and regulatory attention paid to our markets. Some productive; some not. Our industry welcomes strong oversight of our markets to ensure they stay free of manipulation, fraud, and wrongdoing. But we also stand behind the fundamental principle that supply and demand should be allowed reflect actual but sometimes unpopular prices. We must allow markets to do their jobs—no matter how painful—for the betterment of our economy in the long-run.
Are commodity markets perfect? Hardly. These mega trends will bring stress to our markets at times. We recently experienced such an event in the LME nickel market where certain trades were unexpectedly canceled. There are strong views about this decision and many of us are eager to understand the lessons learned from this event. That's why I’m pleased LME CEO Matt Chamberlain has agreed to sit down with me for a public discussion on these issues.
His presence here at IDX is proof that his organization—and our industry in general—is not afraid of difficult conversations in pursuit of better markets. I want to thank Matt for being here.
And I am encouraged that our industry is working hard to make these markets even stronger as we enter this age of commodities.
Another reason I am bullish on our industry is the coming transition to a zero-carbon economy.
The response to climate change is sure to spark continued volatility in key commodities—in battery metals like nickel, lithium, and cobalt; in fossil fuel markets as we manage the clean energy transition; and in carbon-offset and emission trading markets. Climate change is also causing more extreme weather events that will impact agricultural production and regional economic activity.
FIA and its members are committed to market-driven solutions that will assist in this fight. FIA is a supporter of the Taskforce on Scaling Voluntary Carbon Markets as well as the United Nations Sustainable Stock Exchanges Initiative. Our member exchanges are the global trading hubs for an expanding list of green products, and we are seeing record growth in this sector. And we always use forums like IDX to host productive discussions on sustainability issues.
The task before us is a big one. But our industry’s work on sustainability issues gives me great hope for the future of our markets—as well as the future of our planet.
The final reason I am optimistic about our markets is the rise of digital assets. Like financial products in the 70s, energy products in the 80s and equity indices in the 90s and 2000s, the rise of digital assets could be a whole new way that our society thinks about money, banking, and investments. And our markets stand ready to facilitate their development.
What’s just as intriguing are the unique market structures that underlie these products. The technology on which digital assets are built allows for more integrated markets, real-time processing, and seamless collateral settlements. In my view, it will be these market structure innovations that are more likely to impact our industry in profound ways.
So far, most of FIA’s focus in this area has been in the US. In May, FIA submitted comments to the CFTC on a unique proposal by FTX US for a non-intermediated clearing model that features real-time margining and auto-liquidation for defaulting participants. I was even asked to testify on this proposal before a US Congressional committee.
There are many with strong views about this model. But let's set aside the specifics of the FTX proposal for a moment. If you take a broader view of what's happening, this is part of a larger trend where technology is revolutionizing the infrastructure of our markets.
We can all agree that markets benefit from faster settlement of trades and margining, using safe and secure networks. Time represents risk—risk that prices change, operations fail, or counterparties renege. Reducing time to settlement can reduce these risks.
Many in the industry have similar efforts to quicken the pace of risk management and settlement. There are exchanges in this audience that are experimenting with blockchain and cloud technology to improve the speed, applications, and transparency of the trading ecosystem.
This debate is healthy for the industry. It has caused some overdue soul-searching about our current structure and forced us to reflect on the core principles underpinning our markets.
These core principles are important, as they impact far more than just the digital asset marketplace. But thankfully, they’re pretty simple:
- First, markets should safeguard all market users with protections against fraud, abuse, and manipulation.
- Second, markets should maintain their integrity so that price discovery and hedging can function to help drive commerce and allocate capital.
- And finally, markets should be fair. All participants should be treated the same for the activities they perform, the risks they generate or the products they trade.
We must be true to these principles as we welcome new ideas and approaches. It’s in the DNA of our industry and if we don’t, it will be at our peril.
The discussions around digital assets are just getting started. I remain optimistic about the growth and innovation that lies ahead for our industry if we capture this opportunity.
In closing, I’m not naïve about the realities of the work ahead. Commodity market volatility, sustainability concerns, and digital asset innovation are individually complex areas. And addressing them collectively is no easy task.
But that’s what we’re doing.
We’re talking about these issues, not hiding from them. We’re building a framework for collaboration and setting priorities. And we're doing it together, as a community, governed by shared values and shared goals.
One prominent example of this collaboration in action comes via the Derivatives Market Institute for Standards, or DMIST. Thanks to the shared vision of FIA members, this newly formed standards body has begun the hard work of building a better, more resilient operating system for our industry. We are making steady and tangible progress, and I encourage you all to learn more and consider how you can participate.
It’s initiatives like DMIST that give me faith in our industry, even amid recent challenges and uncertainty. We are looking to the future. We are building something better. And we are doing it together.
That’s why I’m so optimistic. And that’s why I’m so excited to be here, back in London. Because this work cannot happen without you.
So thank you. Thank you so much for being FIA members, and for being active partners in building a brighter future for our industry.
And of course, thank you to our sponsors and exhibitors. IDX is a world-class conference because of your support.
I want to extend a special word of gratitude to those of you who are supporting our Futures for Kids Gala that will take place Wednesday evening. This annual event raises funds to support disadvantaged young people around the world. I’m looking forward to bidding at the auction—almost as much as I’m looking forward to seeing Pat Kenny in a kilt.
So let’s not dwell on the daily headlines. Because history shows our industry is capable of great things—even when times are tough.
And I know we will do so again.