Welcome to FIA Expo. I’m Walt Lukken and I want to thank you for being a part of the FIA community. While it’s unfortunate that we aren’t able to gather in-person right now, FIA is committed to bringing you an engaging three days of thought leadership on the topics that matter most to you.
I want to start by recognizing our veterans from this industry who have served their country and sacrificed for all of us. Tomorrow marks the day we recognize our veterans, and we are all truly grateful for your service that has brought us our freedom.
What I most appreciate about the FIA community is that it feels like a family. Like all families, this industry argues with each other, competes vigorously, plays hard and at times, acts a bit dysfunctional. But when push comes to shove, I would put this industry up against any because when it matters most, we come together.
What a chaotic year it has been! Who would have thought a year ago that we would experience a global pandemic, an ensuing economic shutdown, a highly contentious US election, social injustice and unrest, the UK and Europe still working through their divorce, and several major natural disasters tied to climate change? For many of us, 2020 cannot be over soon enough.
But adversity causes you to grow, to learn and adapt. Here’s what I’ve learned over these past six months:
- First, it turns out I actually like my family and oddly enough they like me back. Who knew?
- Secondly, I didn’t realize how important watching sports is to my existence and happiness. During the early days of the lockdown, I found myself watching any sports from professional corn hole to Canadian Curling to Korean baseball. Thank goodness the major sports are back, including the Masters this week. Go Tiger and importantly, go Indiana Hoosiers football!
- Lastly, I realized how much I appreciate and miss seeing the people of this industry and how they came together during the crisis to ensure our markets were up and running.
The term resilience is thrown around a lot to describe our industry, but it is important to understand what goes into becoming resilient. Resilience doesn’t just happen; it is earned.
Our industry has worked tirelessly over the years to make sure our markets function safely in good times and in bad. Since the 2008 financial crisis, our community has engaged with regulatory authorities to strengthen rules, to probe assumptions, to game theory worst-case scenarios and to test our readiness. But the improvements put in place over the last decade had not been tested.
That is until last spring when extreme market volatility provided a real-world stress test.
The good news is that markets proved themselves robust. In spite of the extreme market turmoil, there was no collapse of confidence, there was no breakdown in the clearing system, and the markets remained open and fully functioning throughout. This resilience was achieved in large part by the good work of market participants and regulators working together long hours to keep the markets open. You all should be applauded.
That said, we would be remiss as a community not to reflect on the spring volatility to see if there are lessons learned. FIA members have been meeting since March to review ways to improve the resilience of the clearing system, including analyzing end of day settlements, allocations, and trade-breaks. FIA is working with firms and exchanges to improve and automate processes and standards, so we are prepared for the next period of volatility.
FIA also analyzed how the margin system functioned during the March volatility. To help bring transparency to this topic, FIA recently launched a CCP Tracker tool on its website that publishes public data and visuals on margin levels, default funds and other CCP waterfall information.
Additionally, FIA recently published a white paper that uses public and private data to examine the increases in initial margin at derivatives clearinghouses during the March timeframe.
While margin increases are expected during volatile times, we must make sure that margin levels are calibrated to be predictable and not overly procyclical to cause undue stress during times of market turbulence.
FIA’s paper makes several suggestions and aims to promote an important dialogue within the industry and regulatory community on whether improvements can be made. I am happy to say there are Expo panels this week that will explore these lessons from the Spring.
There is a saying that to know where you are going, you must know where you have been. Our industry’s past is rooted in agriculture and helping farmers and ranchers manage risk and discover prices. Farmers and ranchers are resourceful people whose livelihood is based on both understanding markets and being good caretakers of the earth. These are not mutually exclusive concepts.
I am reminded of my former boss, the late Senator Richard Lugar of Indiana, who owned a 600-acre corn and soybean farm southwest of Indianapolis. The Senator was most proud of his farm’s 60-acre grove of black walnut trees, which he registered in 2006 as the first tree farm to provide a carbon offset with the Chicago Climate Exchange.
As a farmer, the pragmatic Lugar loved the idea that his walnut trees would help his stewardship of the earth. And the notoriously frugal Senator didn’t mind that he got paid to do it. Lugar well understood that incentives and markets matter in our battle to make a more sustainable world.
It is difficult to dispute that climate-related disasters are occurring on a more frequent basis. Over the last two years, global losses caused by natural catastrophes amounted to a record $640 billion annually. For an industry obsessed with data, there is a significant body of evidence that climate risk is a growing threat to the global economy.
Market-based solutions are an important component to unlocking this problem. I have seen time and time again how this industry takes uncertainty and turns it into opportunity.
It was our industry that created foreign currency and financial futures when the world went off the gold standard in the 1970s. It was our industry that brought us electronic and cross-border trading that democratized our markets around the globe. And yes, it was our industry that brought us markets to help clean up the acid rain problem in America and that listed carbon, and more recently water, for the first time on a trading platform.
FIA recently published a policy paper entitled, "How derivatives markets are helping the world fight climate change.” The paper highlights existing industry solutions and potential partnerships with the public sector to help build a more sustainable economy.
FIA is also taking part in a Taskforce on Improving Voluntary Carbon Markets, under the sponsorship of Former Bank of England Governor Mark Carney, now Special Envoy for Climate Action at the UN. This Taskforce published its interim report for public comment today, and I encourage our members to provide comment over the next month to this important document.
There is no silver bullet, but we need to be creative on ways to address the problem. At FIA, we believe that markets must be at the center of any solution. I am proud to be a member of an industry that has stepped up to these kinds of challenges in the past and faced them head on.
I’ll conclude by saying how excited I am by the Expo program ahead. You’ll hear from one of the world’s top infectious disease experts, Dr. Kathy Neuzil, about the state of the COVID outbreak and the race to develop a vaccine. We are thrilled to have forward-thinking technology journalist and frequent CNBC commentator Kara Swisher. And Expo wouldn’t be Expo without thought leaders like CFTC Chairman Heath Tarbert, SEC Commissioner Hester Peirce and one on one interviews with our global exchange leaders.
I also hope you will stop by our virtual Innovators Pavilion to help us determine the 2020 Innovator of the Year.
As many of you know, charitable giving is always a big part of FIA’s events. Especially this year, FIA is proud to continue its support of the Greater Chicago Food Depository. FIA will match individual donations up to $15,000 to this great organization and I am proud to have already personally contributed toward this goal. Please join the Futures Fights Hunger campaign by simply texting “FIA” to 91999 for donation details.
Most importantly, I want to thank our sponsors and exhibitors that make all of this possible. I personally appreciate your support for our industry, especially during this time.
Expo has always been a time that our community comes together to debate and shape the future of our industry. This week also marks the start of a transition with the election of Joe Biden as the next President of the United States. Our thoughts and prayers go out to President-elect Biden during this time as he puts together his team to lead our nation, and our industry looks forward to working with his Administration on ways to strengthen our markets in the coming months.
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