THE NEXT LEVEL of INNOVATION

p28

WHEN DISASTER HITS p16 JON CORZINE GETS BACK IN THE GAME p12
FA L L 20 10 A MAGAZINE PUBLISHED BY CME GROUP

OTC clearing has arrived. Talk to us about OTC clearing the opportunities. has arrived.

Talk to us about the opportunities.

As the OTC markets expand into central clearing you need a partner you can trust. With our experience, insight and established clearing services across exchanges globally, we are well equipped to support you. At UBS we look to understand your individual needs and build an intellectual partnership in order to provide scalable and flexible consultative solutions; delivering our market leading innovative services for the success of your business.

As the OTC markets expand into central clearing you need and as we you can trust. We have made significant investment in our infrastructure a partner continue to With our experience, every aspect of their Futures and Options business, we are support our clients in insight and established clearing services across exchanges globally, guide you through the to support you.for OTC. ready to we are well equipped new landscape At UBS weat OL-UBS-OTC-2-CCP@ubs.com Contact us look to understand your individual needs and build an intellectual partnership in order to provide scalable and flexible consultative solutions; delivering our market leading innovative services for the success of your business. We have made significant investment in our infrastructure and as we continue to support our clients in every aspect of their Futures and Options business, we are ready to guide you through the new landscape for OTC.
UBS 2009. All rights reserved.

Contact us at OL-UBS-OTC-2-CCP@ubs.com

CME GROUP MAGAZINE CME GROUP 20 South Wacker Drive Chicago, IL 60606-7499 312.930.1000 tel 312.466.4410 fax www.cmegroup.com info@cmegroup.com EDITORIAL DIRECTORS Anita Liskey, William Parke EDITORIAL ADVISORY BOARD Tim Andriesen (Commodity Products), Kate Darcy (Market Education), James Farrell (Technology), David Garland (Corporate Communications), Elizabeth Gisch (Globex Account Management), Jeremy Hughes (EMEA Corporate Communications), Dave Lerman (Hedge Fund and Broker Services), Gail Moss (Marketing Communications), Robin Ross (Interest Rate Products), Derek Sammann (Foreign Exchange Products), Allan Schoenberg (Social Media), Michael Shore (Product Public Relations), Scot Warren (Equity Index Products), Meg Wright (Legal), Jaime Yeh (Product Marketing)

FALL 2010 Issue 19

CME Group Magazine is published by CME Group in conjunction with Newsdesk Media Inc. and VSA Partners, Inc. All rights reserved.
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 oliticsisnothingifit P  isnotaplacetohave astrongvoiceonthe thingsyoucareabout. Itisagreatplaceto givebackifyouare properlymotivated.

JON CORZINE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, MF GLOBAL HOLDINGS LTD.

600 West Chicago Avenue Chicago, IL 60654 312.427.6413 tel 312.427.6534 fax www.vsapartners.com
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DO YOU HAVE A QUESTION FOR CME GROUP MAGAZINE? E-mail us at info@cmegroup.com with your questions and comments, or to be added to or removed from the mailing list. Further information about CME Group and its products is available on our website at www.cmegroup.com. Information made available on our website does not constitute part of this document. The Globe logo, CME Group, CME, E-mini, Globex and Ideas That Change the World are trademarks of Chicago Mercantile Exchange Inc. The Chicago Board of Trade and CBOT are trademarks of The Board of Trade of the City of Chicago, Inc. New York Mercantile Exchange, NYMEX and ClearPort are registered trademarks of the New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. The Dow Jones Industrial Average and Dow Jones Indexes are trademarks of CME Group Index Services LLC. BM&F is a trademark of the Brazilian Mercantile & Futures Exchange S.A. BOVESPA Stock Index is a duly registered trademark of BM&FBOVESPA. KOSPI is a trademark of the Korea Exchange Company Republic of Korea. NASDAQ is a trademark of The Nasdaq Stock Market, Inc. (which with its affiliates are the Corporations). S&P and S&P 500 are trademarks of McGraw-Hill Companies, Inc. Case-Shiller is a trademark of Case Shiller Weiss Inc. Green Exchange and Green Exchange Venture are trademarks of Green Exchange Holdings LLC., used under license. Unless otherwise indicated, references to CME Group products include references to exchange-traded products on one of its regulated exchanges (CME, CBOT, NYMEX, COMEX). Products listed in these exchanges are subject to the rules and regulations of the particular exchange and the applicable rulebook should be consulted. Information on trading strategies and products is included for educational purposes only and does not constitute trading advice or constitute a solicitation of the purchase or sale of any futures or options or guarantee any particular trading result. The rulebook of the applicable exchange should be consulted as the authoritative source on all current contract specifications. Articles herein authored by third parties are taken from sources believed to be reliable. 2010 CME Group Inc. All rights reserved. CME Group Magazine is printed on recycled paper.

ON THE COVER

Financial innovation is the lifeblood of the financial markets. Whats coming next in an environment that demands increased transparency, greater accountability and lower risk?

To read CME Group Magazine online, as well as view Podcasts, Webinars and more, visit us at www.cmegroup.com/magazine.

CONTENTS

FALL 2010

Issue 19

12 8 From The Top

A letter from CME Group

20 16 20 Chinas Copper Kettle

Make no mistake, China still stirs the copper market.

35

28 The Next Frontier of Market Innovation

Heres whats next on the horizon for financial innovation.

Executive Chairman and CEO.

12 Jon Corzine Back in the Game

Jon Corzine talks about politics and his new role as MF Globals new CEO.

24 Breaking Up Is Hard to Do
UBS economist Paul Donovan looks at the cold hard facts for the euro.

35 Handicapping the Fed

A look at short-term interest rate liquidity and the latest tool from CME Group FedWatch.

16 When Disaster Hits

Firms and agencies are prepping for the worst, and thats good news.

38 Interest Rate Outlook: Low and Slow

Interest rates continue to hang at record lows. So a hike is sure to come soon or maybe not.

FALL 2010

When the chemistry is right, When the chemistry is right, success is inevitable. success is inevitable.
As a leading cash and derivatives broker, MF Global As a leading cash and derivatives broker, MF Global transforms market risk and opportunity into our clients' transforms market risk and opportunity into our clients' advantage. By applying the key elements of success honed advantage. By applying the key elements of success honed through heritage of 225 years of market leadership, we through a a heritage of 225 years of market leadership, we create targeted solutions for clients around the world. Deep create targeted solutions for clients around the world. Deep market experience, actionable insight, and productive, market experience, actionable insight, and productive, long-standing relationships are the elements we combine long-standing relationships are the elements we combine toto deliver exceptional results. deliver exceptional results. To learn how MF Global can turn the elements success into To learn how MF Global can turn the elements ofof success into your advantage, visit mfglobal.com. your advantage, visit mfglobal.com.

Experience Experience

365 365

Ex

Insight Insight

360 360

Relationships Relationships

24/7 24/7

In Re Re
mfglobal.com mfglobal.com
The products and services mentioned herein are available from MF Global Holdings Ltd. subsidiaries located in in The products and services mentioned herein are available from MF Global Holdings Ltd. subsidiaries located jurisdictions worldwide and registered with local regulatory authorities asas may be required. Products and services jurisdictions worldwide and registered with local regulatory authorities may be required. Products and services may not be available inin all jurisdictions. Please consult www.mfglobal.com for more information. Trading in may not be available all jurisdictions. Please consult www.mfglobal.com for more information. Trading in financial instruments may involve significant risk ofof loss. Nothing contained herein should be considered as an financial instruments may involve significant risk loss. Nothing contained herein should be considered as an offer or the solicitation ofof an offer to sell or to buy any financial instruments. 2010 MF Global Holdings Ltd. offer or the solicitation an offer to sell or to buy any financial instruments. 2010 MF Global Holdings Ltd.

CONTENTS

24 42 State Capitalists on the Fast Track

Ian Bremer looks at the hybrid capitalist state in his new book The End of Free Markets.

42 59 Current Pulse
zz In the Palm of Your Globex zz Wharton Hedge Fund Conference zz Simplify It zz Calgary Connection zz Green Light zz The Story of Innovation

55

Featured on cmegroup.com/magazine
Central counterparty clearing services have existed in the over-the-counter (OTC) derivatives market for a number of years. Expanded OTC clearing will require market participants to rethink the way they structure and trade OTC derivatives.

46 The Algorithm of Success

Prague-based RSJ rises to be one of the biggest trading firms on CME Group.

51 Korea Exchange Goes International

Korea Exchange brings its Kospi 200 index futures global.

62 Finding Green in Unexpected Places

CME Groups new data center is the size of four NFL football fields and just as green.

55 Got an Eye on You

Technology watches traders.

FALL 2010

Craig Donohue (left) and Terry Duffy (right)

CME GROUP MAGAZINE

FROM THE TOP

Details create the big picture, but when it comes to the financial reform legislation that President Barack Obama signed into law this summer, many of the details remain to be seen. The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most sweeping rewrite of U.S. financial regulation since the 1933 Glass-Steagall Act. The new legislation is a comprehensive banking and financial services reform package that includes significant changes to the oversight of derivative markets. The Dodd-Frank Act contains numerous provisions that have an impact on how overthe-counter (OTC) and listed derivatives are traded. More standardized OTC derivatives will trade on exchanges or other trading platforms, and will be routed through clearinghouses post-transaction. U.S. regulators will also be involved in setting capital and margin requirements for dealers and major traders and crafting new business conduct standards and reporting requirements. Exactly how and, to a certain extent, when this will be done has been left in the hands of the Commodity Futures Trading Commission (CFTC) and other regulators and government agencies. Because of that, the rule-writing process is considered to be nearly as important as the drafting of the financial bill itself. The bill gives regulators leeway to fill in the blanks on key areas, so agency rulemaking will determine the final shape of reform. An important concern raised about financial reform is that it could potentially stifle financial innovation. Innovation has always been a driving force at CME Group. Our cover story for this issue looks at some of the significant innovations of recent years and the outlook for new ideas, concepts and products going forward. Other subjects covered in this issue include:

MF Global chief executive officer Jon Corzines perspective on the evolution of financial markets gleaned from his 30-plus year career in financial services and public service. The rise of state capitalism and the challenges it presents to free markets as perceived by noted political risk consultant Ian Bremmer. China's rapid ascendancy up the global economic ladder and the impact of its growing demand for copper.

We hope the details you find in this issue of CME Group Magazine will begin to give you the big picture as we move through this next, historic stage in financial markets.

TERRENCE A. DUFFY

Executive Chairman

CRAIG S. DONOHUE

Chief Executive Officer

FALL 2010

12

CME GROUP MAGAZINE

jon corzine

Back in the Game

jon corzine returned to the financial industry in march 2010 as chairman and chief executive officer of MF Global Holdings Ltd. after spending the previous decade in public office. Corzine served as governor of New Jersey from 2006 to 2010, and in the U.S. Senate from 2001 to 2006. Prior to that, Corzine was chairman and senior partner at Goldman Sachs, where he spent more than 20 years. CME Group Magazine sat down with Corzine to hear his thoughts about coming back to the industry, his vision for MF Global and where todays regulatory environment will lead the firm in the coming months and years.

FALL 2010

13

BACK IN THE GAME

With your long career in the financial services industry and in politics, why did you decide to take the chief executive officer position at MF Global? This is an underdeveloped asset, not only as a futures commission merchant (FCM) but also as a broker-dealer and engaging in activities well beyond what this firm has been traditionally involved in. Im excited about repositioning a good franchise into what I think is a pretty attractive space thats been created first by globalization and the change in the way the general financial services industry operates. Whether you do that in the context of financial regulatory reform or Basel, Basel III or any other changes, that plays to the core strengths of the franchise.

So does that leave MF Global in a good position, because youre of course a large clearing member firm? We have the knowledge and expertise to deal with exchange traded and cleared products that should give us an edge. On the other hand, the price of entry may be so high in some areas that places like MF Global will be challenged. So we will have to work with the dominant clearing players in some other format to meet the requirements of the system, but not be precluded from them. There is a lot of work yet, to make sure the system is not exclusionary.

vices over time. So if you are strictly limited to commissions, you will be limited. Itll be nice when interest rates rise, from the standpoint that our customers will want more intermediation in a rising interest rate environment, but that also comes with risks on the principal side.

There are some who believe that financial engineering such as collateralized debt obligations (CDOs) and credit default swaps (CDS) put the U.S. and global economy in peril. Financial reform is designed in part to police some of these historically new products. Will we still see financial innovation in this new regulatory environment? Absolutely. People are working on refitting securitization so it will have greater transparency and simplicity. It will be different but once the rules are set, people will work creatively within those constraints. I think change begets innovation.

It is still just a few months since you took the reins at MF Global, but what can you tell us of the plans going forward? There are a lot of good people working here. There is a lot of know-how. That provides a solid framework to build upon. We have a very significant client group with a very good deposit base. We know some markets really well such as metals and energies. Were one of the premier FCMs in India. There are niches of extraordinary strength. Were moving along in other core businesses such as equities and fixed income and have a strong foreign exchange business. We recently conducted a stocking offering to significantly improve our equity position. We refinanced our liquidity facility. Weve done a lot of things I think will lead us to a great position going forward. One of our problems has been that we have not been a principal risk taker to facilitate our clients in listed markets. That will change and provides a very strong means to expand our relationship with clients and can be done without turning into a proprietary trading shop, or one with excessive risk. And on that score, financial regulation is also important. The deleveraging of the system, changes to the regulatory systems, means a greater opportunity to access clients who want risk intermediation but now wont have access at those same kinds of leverage elements with some of the existing participants. I dont think there will be any less demand for risk intermediation. That demand will flow to other aspiring institutions, and we intend to be one of them.

You left Goldman Sachs in 1999 and served in political office for a decade. What experiences do you take from those roles? I was honored to serve in public life. I saw the importance of the role of government in shaping the macro- and micro-environment before I got into government. So I had some of the same frustrations that many people have. I had a lot of views about the direction, not just on financial and economic activities, but also in education and other areas. Politics is nothing if it is not a place to have a strong voice on the things you care about. It is a great place to give back if you are properly motivated. The execution is focused on the people you serve, as opposed to serving yourself.

Todays markets are more global and interconnected than ever. MF Global is truly a global firm. Should regulation be administered on a global basis? Yes, in an ideal world. But theres a lot more cooperation among governments and regulators today with common accounting standards and common bank capital charges. Im sure that once other countries take on the challenge the president and Congress just completed, you will get some matching up of the systems on a global basis because people understand that regulatory arbitrage was as much a part of financial crisis as CDOs and CDSs. If there are gaps, it can hurt the whole system.

Financial reform was just completed. What impact do you see it having on the derivatives and brokerage space? First, it is a positive for the economy. Maybe the most important piece is the central oversight board for all aspects of the U.S. financial system. Even with the chair of that oversight board being the Secretary of the Treasury, most of the real work will be done by staff of the Federal Reserve. Thats good because in a time of crisis, our financial system will have the immediate levers of the Fed. And they have the ability to understand the system significantly better than all of the regulatory agencies did before because they can identify significantly risky institutions. Having clearinghouses, variation margin, systematic recognition of the existence of risk and how it is managed, really needs to be part of the financial system. Sometimes there needs to be position limits placed on participants based on their capital. The derivatives part of the legislation is great for the system because it will bring more capital in and make it less risky. Then people will invest more and the economy will grow.
14 CME GROUP MAGAZINE

What does the global derivatives landscape look like to you now and going forward? Youre going to have a globally integrated system. It wont be perfect. Youll have a greater recognition that there is a high degree of relationship between all asset classes that gets reflected on exchanges. And there will be a greater diversification of risk and intermediation. And that is going to leave room for new entrants, or new players in various parts of the marketplace. Certainly in the mid-sized broker-dealer/investment bank space, there is plenty of room to grow and Im excited about it.

The brokerage business, especially non-bank brokers, has been hurt by the low interest rate environment over the past year or two. How can MF Global navigate that environment? First, if you limit yourself to brokerage alone, that clearly is a challenge. But we dont intend any longer to be just a pure brokerage firm. We want to be a broker-dealer and perhaps expand into advisory and/or portfolio management ser-

Leveraging every facet of global commodities.

Understanding and insight into the multifaceted global commodities markets is a critical advantage. Our commodities team leverages this insight to customize client solutions across a wide array of products including structuring, trading and marketing of metals, crude oil, refined products, natural gas, coal, power, emissions, commodity indices, structured notes, wet and dry freight and weather products. Whatever your challenges, we deliver a perspective that can help you shine in any market.

Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (Investment Banking Affiliates), including, in the United States, Banc of America Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, which are both registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed. 2010 Bank of America Corporation.

16

CME GROUP MAGAZINE

Unexpected events can wreak havoc on business operations, but the difference between a minor disruption and a disaster can come down to the preparation and ability to deal with surprises.

FALL 2010

17

The past decade has offered its share of unforeseen events 9/11, the H1N1 flu pandemic, the Northeast blackout of 2003 in the United States, Hurricane Katrina in 2005 all of which tested the resiliency of business operations. Smart companies used lessons from these events to build business continuity plans for use when emergencies strike. These plans focus on critical needs to return to as normal a business pace as possible. Proactive companies then review and test those plans to make sure they are operable when needed. The financial services industry is no exception.

Testing and varying of testing scenarios is the number one lesson learned from past disasters, says John Rapa, president and chief executive officer of Tellefsen and Company, a financial services management consulting firm. A significant business disruption or a crisis is a bad way to find out your plan does not work. Rapa says not only has testing of primary and backup systems become standard, but potential business partners and regulators are doing more rigorous analysis that may be shared. Groups such as the Futures Industry Association (FIA), where Rapa serves as chairman of the business continuity committee, have offered common testing dates for the industry to test resiliency and preparedness. The FIA and Securities Industry and Financial Markets Association have common industry disaster recovery tests set for Oct. 23, 2010. Rapa says the core of business continuity planning identifies what businesses, systems or processes are considered critical to the individual company. From there a business continuity strategy is formed that can cover everything from technology in the workplace to the death of the chief executive officer. Kenneth Wolverton, vice president of data center operations at CyrusOne, which operates corporate co-location facilities in Houston, Dallas and Austin, says business continuity previously was focused on the technology side, but now the people side is receiving attention. Its not just how can I back up data, but how can I take people to the new location, do they have places to shower, places to sleep if its an extended time, Wolverton says.

businesses and the government. Groups like ChicagoFIRST and the Financial Services Sector Coordinating Council (FSSCC), are privatepublic partnerships that work on a regional and national level to help members with best practices. These partnerships are unique as they bring together firms and organizations that might normally be competitors. Brian Tishuk, executive director for ChicagoFIRST, says one result of collaborations between firms and the local government is the Chicago Critical Infrastructure Resilience Task Force. Launched in April, the task force addresses evacuation plans, credentialing and information sharing between public and private, and private and private groups. Its teaming up to know what the governments plans are in an emergency and how firms can be part of the solution, Tishuk says. Shawn Johnson, chair of FSSCC, says such private-public partnerships help coordinate resources during a crisis on some of the most practical matters such as simply identifying where citizens can withdraw cash. During the Texas hurricanes last year, FSSCC and the Financial

ChicagoFIRST advocates priority business access for the Internet in cases of national crisis. There already are priorities for telephone and wireless access, but such priorities are needed for the Internet. Rules on the topic still need to be worked out between the Department of Homeland Security and the Federal Communications Commission. But that is yet to be reconciled with the current idea of net neutrality which provides everyone equal access to the Internet. Yes there should be net neutrality, Tishuk says. In the case of cyber attacks, theres a desire to have a kill switch to the Internet. We simply want a priority switch during emergencies.

Because the Internet has become such a part of everyday life, cyber security has become a greater part of resiliency programs, experts say. Whether it is as simple as a phishing scam to someone trying to shut down systems, cyber threats have become much more visible.
FINDING SECURITY

Johnson says FSSCC has looked at threats from cyber space and is working to improve intelligence sharing with the federal government. One FSSCC study highlighted the threat from undersea communication cables to the international financial system. The organization has also been asked for input on a bill sponsored by U.S. Senator Joe Lieberman called Protecting Cyberspace as a National Asset Act of 2010, which focuses on how it would affect finance. This bill suggests establishing a director of cyber security and a private-public partnership to set national cyber security priorities and defenses. The poor economy could cause some business to look warily at costs, Wolverton says, but

You cant perform critical business operations if youre not real time.
BRIAN TISHUK, executive director, ChicagoFIRST

One growing trend is allowing and enabling employees to work from home in cases of emergency. Technology has allowed desktop virtualization where employees can access their work computer from home or another remote location to become a viable alternative. The H1N1 flu outbreak underscored the need to plan business operations when employees would be unable to enter buildings but access to systems was still possible.
WHEREVER YOU ARE

The H1N1 flu pandemic also underscored how important communication is between

Services Information Sharing and Analysis Center monitored ATM transactions to see what areas had power and which ATMs were able to dispense money to get funds distributed. One concern about events like the H1N1 pandemic is that Internet access in areas outside a business district can be less than robust. There are generally fewer fiber optic lines in residential areas where someone telecommuting could be competing for bandwidth with a neighbor downloading a movie. That can slow down Internet access and become an issue if telecommuting workers have to share bandwidth with nonbusiness users during an emergency. You cant perform critical business operations if youre not real time, Tishuk says.

so far that does not seem to be the case. The more proactive firms tell their investors that they have infrastructure in place to avoid a significant business disruption during a crisis or disaster. Yes, Godzilla might not rise from Lake Michigan, but who would have thought planes would fly into buildings? Rapa says. People may say it never will happen, but never is a long time. Another intangible asset that is a part of business continuity plans: image and reputation. The BP oil spill is the most prominent recent example of not being properly prepared and is a cautionary tale for companies. Whats the PR loss, especially if youre a public company? Wolverton asks. The public is now asking, why didnt you have that put in place?

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CME GROUP MAGAZINE

Every winner needs a trusted partner.

As an impartial multi-asset broker, were focused on your success. Solid and reliable, we combine powerful liquidity capabilities with leading-edge technologies and a spirit of partnership that extends across more than 20 financial centers worldwide.

EXECUTION CLEARING PRIME BROKERAGE

Newedge refers to Newedge Group and all of its worldwide branches and subsidiaries. Only Newedge USA, LLC is a member of FINRA and SIPC (SIPC only pertains to securities-related transactions and positions). Not all products or services are available from all Newedge organizations or personnel and restrictions may apply. Consult your local office for further details.

CHINAS COPPER

KETTLE

20

CME GROUP MAGAZINE

When it comes to copper, China is the leading consumer. That economy, more than any other, has been driving copper prices for years. And in the coming months, its influence on the red metal will likely grow.

In the world of base metals, China is the elephant in the room, says David Thurtell, a Citigroup metals strategist in London. There is no escaping the countrys demand for copper and it cannot be ignored any more than Chinas rapid ascendancy up the global economic ladder. China has eclipsed the United States as the worlds largest consumer of energy. Soon, it also will supplant the United States as the top manufacturer, according to projections by IHS Global Insight, an economics consultancy. While it is not the only game in town in terms of copper demand, China is by far the biggest and most important. China imported a record 3.2 million metric tons of copper in 2009, up 119 percent from the previous year. Since 2000, Chinas copper demand has almost tripled. Nicholas Snowdon, commodities analyst for Barclays Capital, estimates China currently consumes about 38 percent of the worlds refined copper.

Thats coming from a level of below 10 percent in the 1980s, Snowdon says, adding that a move toward 40 percent or even beyond is not out of the question over the next few years. The future bodes well for the seemingly symbiotic relationship between China and copper, even though the International Copper Study Group estimates a 13 percent drop in the countrys demand for copper in 2010. Rising living standards in the worlds most populous nation Chinas population is forecasted to increase from 1.3 billion this year to 1.43 billion by 2020 means more automobiles, electricity generation and power lines, housing, air conditioners and infrastructure, some of the copper-rich comforts to which the West has grown accustomed for decades. In short, a good deal of Chinas copper demand is related to residential construction and infrastructure expansion.

Those processes are far more limited in developed economies than in countries such as China and India, Snowdon says.
HOME GOODS

In the summer of 2010, concerns surfaced that Beijing, after reaping a rich economic harvest from a $586 billion fiscal stimulus, was applying the brakes to cool its white-hot economy. Gross import figures for copper fell in June to 328,230 metric tons, down from 396,710 metric tons in May and well off the 477,220 metric tons imported in June 2009. Catherine Virga, senior base metals analyst at CPM Group, a commodities research firm, says the June numbers were lower than we were expecting. But the real question is whether the downward trend would continue. Virga does not think so. What were seeing in China is restocking efforts, she says. This is not atypical for the

FALL 2010

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CHINAS COPPER

The entire industrialization process in China should continue to support sustained global demand growth in copper.

copper market. We have seen many periods of restocking in China. It depends on how you calculate demand, whether you adjust for restocking inventories. Its complicated, which is why estimates vary so much. In June, particularly the latter part of the month, Weve seen demand from Asia that was flat-lining, moving toward very low levels, Virga says. Then it started to rise and in late June it picked up kind of, with force. Copper stockpiles usually rise in the summer with the traditional lull in Northern Hemisphere manufacturing. Through midJuly, though, stockpiles declined, according to Thurtell. And prices reflected the change. Copper futures for September delivery at CME Group were just above $3.00 a pound in mid-summer, compared with $3.60 in April. At the London Metal Exchange, copper for threemonth delivery was around $6,600 a metric ton. In April, copper had flirted with $8,000 a ton.
SUPER-CYCLE ME

Just a few years ago, copper circles buzzed with speculation that the metal was entering a commodity super-cycle, meaning a price of $8,500 per metric ton that could be maintained for a prolonged period of time. Much of that talk was muted by the 2008 global economic crisis, particularly in the United States and Europe. Snowdon contends the market has been overly concerned about economic uncertainties recently, whether thats the European fiscal issues or the effects of policy tightening taking place in China. Our economists forecasts have held firm to the view that the global economic recovery will be sustained, and as a result we believe the market has overreacted to these concerns, he says, adding that China and its future growth

path have certainly created a new dynamic to commodity markets. So where are copper prices headed over the next six months to a year? Most likely upward, analysts agree, although their forecasts differ somewhat. We think copper is going to hold at the $6,000 metric ton mark and maybe go as high as $7,500 next year, says Thurtell, who admits he is not as bullish as some who say the price could climb as high as the supercycle price. He also believes there will be significant producer selling once copper heads back above $7,500. Virga points out that price forecasts for the third quarter of 2010 have copper averaging about $6,830 per metric ton. In the fourth quarter, CPM is forecasting a little more strength as copper moves into deeper deficit conditions, in terms of production and demand, so it will be $6,900. Given the copper balance for 2010 and 2011, current price levels in the mid-$6,000 range will be seen as a bargain in our view, says Snowdon. We expect market fundamentals to tighten over the next 18 months. Barclays forecast for 2012 calls for copper to average $8,500 a metric ton, so we expect record price levels essentially over that time.
CHINA THE DRIVER

projected by the International Copper Study Group to increase by 6.7 percent, with capacity utilization rates seen improving from 80.7 percent in 2009 to 84 percent in 2010. A lower growth of only 2.9 percent is envisioned for 2011 because of deferrals and delays in mine projects prompted by the economic crisis. The entire industrialization process in China should continue to support sustained global demand growth in copper. Electrification in China will continue to support robust growth in copper demand, says Snowdon. Youll see greater emphasis on electric vehicles and thats likely to support copper usage as well, as there will be higher copper content in electric vehicles than in traditional cars and trucks. China and copper, sums up Thurtell, is a bullish metals story and it will remain that way for some years. Once Chinas had its day, its Indias turn.

CME Copper Volume for Jan-Jun 2009 and Jan-Jun 2010

1,200,000 1,000,000 800,000

China is expected to be the main engine driving that price surge. Analysts say that will happen because China, while a copper producer, depends heavily on imports. Production, meanwhile, is barely keeping pace with demand. And few new mine projects are scheduled to come on line in the next couple of years. So after being limited by operational constraints and temporary cuts in 2009, mine production in 2010 is

600,000 400,000 200,000 0 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10

Electronic Volume

Pit Volume

Ex Pit Volume

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CME GROUP MAGAZINE

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CME GROUP MAGAZINE

The Treaty of Maastricht, signed in 1992, brought the birth of the euro in 1999. The currency has been a success in the view of many but the financial crisis has exposed cracks in the currency as certain European countries saw their economies spiral downward faster than others. Now UBS economist Paul Donovan takes a provocative look at the pluses and minuses for the worlds second largest reserve currency.

BREAKING UP IS HARD TO DO

WHAT IS THE MATTER WITH THE EURO?

In 2010 we have seen the single currency fall in value, bond spreads widen out and extraordinary measures established to aid Greece and potentially other sovereign states. The irrevocable monetary union that was established by the Treaty of Maastricht has even had some commentators suggest that it might be time to revoke membership for some of the participants. In fact, much of what we see this year is the symptom of the disease, not the cause. The Greek fiscal woes, the volatility of financial markets and the divergence of growth are all in response to a single underlying problem the euro does not work.
THREE CRITICAL ELEMENTS

Three basic criteria were necessary to make the euro an economic success. First, there had to be a political desire to participate. That was the easiest hurdle to membership as most countries wished to join (the exceptions were Denmark and the United Kingdom). The second criterion was a reasonable balance sheet. Government debt and deficit levels had to be at manageable levels. Levels were actually spelled out in the Treaty of Maastricht a maximum 3 percent gross domestic product (GDP) deficit, and a maximum 60 percent GDP debt level. However, these were arbitrary and glossed over.

The most critical criterion for a successful euro was that the participants had to have economies that were fairly similar in their structure and growth patterns. In a currency union, the components share a single interest rate and a single exchange rate. Setting an appropriate single interest rate to be shared by one country or region that is growing at 3 percent a year, and another that is growing at -3 percent a year is pretty much impossible. The real economies need to converge and stay converged. On this basis, the euro could probably have comprised six economies Germany, France, Austria, Netherlands, Luxembourg and, with some generosity as to debt criteria, Belgium. Beyond that, the euro is doomed to fail economically. So, if the monetary union does not work, does that mean it is about to fragment? Absolutely not. The issue with the euro and indeed any monetary union, is that even if it is inadvisable to join, it is even more inadvisable to leave once one is inside.
SEVERANCE COSTS

The costs of departure are huge. A weak economy that leaves would almost certainly default on the national debt. The debt is denominated in euros, of course. Leaving would mean that the exiting country has a new national currency the nuova lira, or the new drachma or the nouvelle franc. With no tax revenue in euros, it is almost im-

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possible to pay even a part of the national debt. However, countries can default or restructure debt within the euro. Indeed, there is a distinct possibility that at least one weak economy will restructure in the next few years. What makes a euro exit even worse is that the corporate sector will in all probability have to default. Corporations will have euro liabilities to overseas banks, or in the form of bond issues. Their domestic revenue streams are now in the new national currency. A default event, and the subsequent banishment from international capital markets, seems inevitable. The default story is bad enough, but it does not stop there. The domestic banking system is likely to be debauched in advance of any euro exit. Depositors who fear that a country may exit the euro are likely to turn up at their banks in advance of the exit, clutching large suitcases and demanding that the contents of their bank accounts be handed over in euro notes. In short, a run on the banking system precedes the departure from the monetary union. Finally, departure from the euro almost inevitably means departure from the European Union (EU). Certainly, that is the conclusion of the European Central Banks (ECB) legal advice. Trade ties with all an economys key trading partners are broken. Any attempt by the exiting country to devalue the new currency will be met with tariffs from the remaining EU members. (Tariffs cannot, of course, be applied within the EU as it is all effectively interstate commerce.) So, a euro exit means sovereign default, corporate default, a major negative growth shock, a debauched banking system, exit from the EU, tariffs against ones exports to eurozone countries and the ending of most major trade relations. Considering that, major civil unrest has to be thought likely as well but that is perhaps left to one side in the analysis; it would not do to be too pessimistic. The euro does not work, but departure seems unlikely given the horrific consequences. Does this mean that the euro area is condemned to a dire economic future? Not necessarily.
THE RIGHT ROAD

EUR/USD FUTURE PRICES (USD per EUR)

1.50 1.45 1.40 1.35 1.30 1.25 1.20

There are three routes to making the euro work routes followed by the United States in the 1930s after the effective collapse of the U.S. monetary union in 1933. The first is labor flexibility or pay restraint. If areas with high unemployment restrain wages they eventually become more competitive and balance is restored to the monetary union. This has happened in parts of the eurozone, but it is unlikely to be a universal solution. Germany and other north European states may pursue this. There is little evidence of the southern European states embarking on such a course of action. France, in this context, should probably be classified as a southern European state. If labor flexibility does not apply, there is always labor mobility as a second option. Unemployed workers move in search of jobs. Europe, sadly, has no John Steinbeck to urge the process on. Workers are not moving across national boundaries.

The third option remains and this is the path that Europe is tentatively embarking upon. Europe, like the United States 80 years ago, needs a fiscal union if it is to make its monetary union more effective. That does not mean that weak governments are subsidized, but rather that weak economies receive a stimulus they do not have to pay for, and strong economies are restrained. This makes the economy more homogenous and a single monetary policy more effective. The U.S. fiscal union does not mean the government of California receives direct assistance from the taxpayers of New York, for instance but it does mean that the citizens of California receive welfare benefits funded in part by the federal tax receipts from New York residents. Can Europe do this? Probably. Fiscal confederation is the way to think about it a simple redistribution mechanism without a strong central government. It will require more integration, however. This is where the difficulty comes in. Europe has achieved a great deal of integration over the past half century but most of it has come out of a crisis. The current crisis provoked further integration such as the various bail-outs. For Europe to get to a fiscal confederation, it would likely require a series of additional crises. Europe can solve its dysfunctional monetary union, but it will take time, five years or more. The current crisis is just the first in a series over that period. Practically, what does this mean? The periodic crises of Europe are likely to keep downward pressure on the euro. Growth implications suggest the ECB will keep interest rates lower for some time. More significantly, perhaps, it means that the international confidence in the existence of the euro will remain weak. The ongoing debt problems of southern Europe keep the structural flaws of the euro at the forefront of investors minds. Constant reminders of the fault lines in the euro will be an effective deterrent for euro appreciation. This is not to say the U.S. dollar is a good currency in the coming years the problems of the dollar make it a bad currency. The problems of the euro make it a worse currency, however.
Paul Donovan is managing director and deputy head of global economics at UBS. He is responsible for formulating and presenting the UBS Investment Research global economic view, drawing on the banks world-wide resources.

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THE NEXT LEVEL of INNOVATION

Financial innovations of the past 30 years, such as collateralized debt obligations, are getting much of the blame for the current economic downturn. But in a globalized world with rapidly developing technology, the need for new forms of finance and commerce continues. Here is what is on the horizon in an environment that demands increased transparency, greater accountability and lower risk.

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IDEAS THAT CHANGE THE WORLD

Imagine a world in which there were no automobile leases, no long-term, self-amortizing home mortgages and no credit cards. Then imagine yourself in such a world. Unless you were lucky in birth, marriage or inheritance, odds are your financial reach would be considerably shorter than it is today.

The reality is that our globalized, highly developed world is dependent on a cornucopia of financial instruments, many of them invented in the last generation. Even some of todays most vilified instruments, such as credit default swaps, continue to serve a key function in facilitating the movement of wealth and minimizing risk. In fact, the development and launch of new financial instruments is accelerating, according to a recent CME Group report New Product Success in Futures Industry. CME Group more than doubled the number of new futures instruments it introduced last year, from 82 in 2008 to 188 in 2009. In the same period, Eurex more than tripled its new futures products, from 7 to 22. However, the acceptance of new instruments, as measured by new product volumes, has generally slumped in 2009, after a peak in 2008, the report notes. The marketplace is a little hesitant to embrace new frontiers, says Julie Winkler, CME Groups managing director of research and product development, which developed the report. I think were going to move in a more lateral direction for a while as the backlash from credit default swaps and the bailouts settles in to the broader financial community.
FINDING ROOTS Resistance to new financial products also has deeper roots, according to Harvard University economist and Nobel laureate Robert Merton. Speaking at CME Groups Global Financial Leadership Conference last year, Merton observed, There is a fundamental mismatch between financial innovation and the necessary infrastructure to support it. He also cited a systematic bias against the new versus the old. To create a friendlier environment for product development, Merton suggested that regulators require fair value accounting for the purpose of transparency. He also recommended an idea first proposed by Andrew Lo, director of the M.I.T. Laboratory for Financial Engineering the creation of an agency of forensic-style analysts to investigate major events and financial failures. Both of these recommendations appear to have been incorporated to some extent in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law July 19, 2010. The requirement that most derivatives must be traded on public exchanges will establish fair value accounting for a whole new category of investments by setting daily market prices. And

although no investigative units have been established by the Dodd-Frank Act, a new Council of Inspectors General on Financial Oversight could wind up following major trails of foul play. So what would successful financial innovation look like in the post-recessionary, Dodd-Frank era?
THRILLS AND TRILLS Yale University economics professor Robert Shiller suggested a number of forward-looking ideas in his article, Crisis and Innovation, published in the spring 2010 issue of The Journal of Portfolio Management. Among his suggestions: Regulatory hybrid securities Developed by the Squam Lake Working Group, a periodic gathering of academics, these issues of bank debt would convert to equity for troubled banks in the face of extreme systemic crisis, thus providing banks with new capital the result of not having to pay interest on the bonds and averting government bailouts. Continuous workout mortgages Proposed by Shiller in his book Subprime Solution, these mortgages would reduce a homeowners principal in the event of a wide-ranging decline in housing prices. Trills Developed by Shiller and Stanford University economics professor Mark Kamstra, the trill would be a share of a sovereign governments gross domestic product (GDP), which the government would sell as equities. The trill would pay a dividend equal to one trillionth of the nations current year GDP and would be priced by the market. Shiller is widely known for spearheading efforts to develop futures and options markets for single-family residences. He has worked with CME Group to establish market listings and he developed the S&P/Case-Shiller Home Price Indices with economists Karl Case and Allan Weiss. Gary DeWaal, group general counsel for Newedge, one of worlds largest futures commission merchants and a leading multi-asset broker, sees a demand for commodity-linked deposit instruments in the near term. I would think by this point investors would be tired of their zero-percent returns in their money market accounts and their savings accounts, DeWaal says. So if you can get a certificate of deposit from a bank with a gold-linked coupon that has a floor and other protections, I think there would be a market for it.

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IDEAS THAT CHANGE THE WORLD

Recognizing Innovators
Innovation does not happen in a vacuum. It is the result of visionary people applying new ideas to real situations. To foster such ideas and their applications, CME Group founded the CME Group Center for Innovation (CFI) under the direction of CME Group Chairman Emeritus Leo Melamed in 2003. Among its many activities, CFI sponsors programs that explore the principles behind innovation and showcases their applications to a broad and diverse audience. A major component of CFI is the Competitive Markets Advisory Council (CMAC), created in March 2004. Composed of leading financial experts, CMAC explores and analyzes critical market issues. Members include Jack Gould, former dean and professor from University of Chicago Graduate School of Business who serves as chairman; Gary Becker, Nobel laureate and University of Chicago professor; David Hale, esteemed international economist; Robert Merton, Nobel laureate and MIT professor; Michael Moskow, former president of the Federal Reserve Bank of Chicago; and Robert Shiller, Yale professor. The signature program of the CFI is the CME Group Fred Arditti Innovation Award, created to honor and promote innovation in action. Selected annually by members of the CMAC, the award honors an individual whose innovative idea, product or service has created significant change to markets, commerce or trade. The award is named after CMEs former chief economist and senior executive vice president of planning and development, who helped create Eurodollar futures. Past winners of the Arditti Award are Harry Markowitz, Nobel Prize winner in economics; Michael Bloomberg, founder of Bloomberg LP and mayor of New York City; Eugene Fama, distinguished professor of finance from the University of Chicago Graduate School of Business; Leo Melamed, founder of financial futures and CME Group chairman emeritus; and William Sharpe, Nobel Prize winner in economics.

The lengthy timeframes involved, the duration risk and other elements are very specific to these industries, and these are industrial sources of growth that we havent seen that much in past economic cycles.
Glenn Yago,
Executive Director of Financial Research, Milken Institute

DeWaal also sees market potential for instruments based on portfolio margining, that is, applying the net assets of an entire portfolio toward the capital, or margin, required for buying or selling equity-based financial products, whether they are securities or not. The Dodd-Frank Act allows portfolio margining, or combining of assets in securities and futures accounts into one account. Theres really never been true portfolio margining in the United States across multiple assets because of the bifurcation of the regulatory structure, DeWaal says. But now some of the legal obstacles have been eliminated by Dodd-Frank.
BUILDING STRUCTURE Glenn Yago, executive director of financial research at

the Milken Institute, foresees the return of structured products in the immediate future. We just recently had the first couple of collateralized loan obligations issues since the crisis, so I think there is quite an appetite for the higher yields of CLOs, Yago says. I also think youll see more transparent mortgage products emerge again. We also now have enabling covered-bond legislation, so products like covered bonds will probably gain traction, but all forms of securitization or structured products will have to have more flexibility than in the past. Covered bonds are debt securities backed by cash flows from mortgages. The bonds are similar to securities based on the securitization of mortgages. However, covered bond assets remain on the issuers consolidated balance sheet. Yago also sees a major role for structured products in the areas of clean technology, industrial biotechnology, biomedicine and other developing industries.

Its very difficult to finance these industries solely through bank loans and expensive equity, Yago says. The lengthy timeframes involved, the duration risk and other elements are very specific to these industries, and these are industrial sources of growth that we havent seen that much in past economic cycles. He is also hopeful that the definition of financial innovation itself will get a reappraisal. At the Milken Institute, we dont consider a very complex financial product that nobody can understand and that has no transparency or access to underlying collateral as a financial innovation, Yago says. Rather, such an instrument, like the complex mortgage-backed CDO, is a flawed product that failed. For a financial product, service, process or organizational form, for delivery to be truly innovative, it must add value to enterprises and investors by lowering the cost and increasing access to capital.

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PRODUCT FOCUS

While a zero-interest-rate monetary policy may have helped to get the economy back to its feet, it left the short-term interest rate market flat on its back. Then in February 2010, Federal Reserve Chairman Ben Bernanke announced plans to exit this strategy. Other factors, including the implementation of market maker programs and new technology, have served to support interest in CME Group Eurodollar futures and Federal Funds futures products.
Liquidity measures tend to focus on width and depth of market. Market width may be quoted in ticks or in dollars for orders of a given quantity and market depth may be measured in contracts at different levels in the limit order book. CME Group research shows liquidity in interest rates was down slightly in the second quarter of 2010 from very strong levels in the previous quarter of 2010. The change was attributed to the increase in volatility across many market classes during the second quarter as a result of the European debt crisis and concerns that a double-dip recession may be approaching. Helping support liquidity in CME Group interest rate products were market maker programs implemented by the exchange, as well as new technology that allows for electronic trade of complex options trades and spreading. These programs were put into play between 2005 and 2008.

Thomas di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, contends that there will likely be some pressure in front rate products going forward. Because they have been low for so long, the market will likely see a significant flattening of the yield curve. He foresees a deflationary environment continuing through 2011 in the United States and believes the Japanese investor base is keen on the same deflationary theme, as they have seen similar trends in Japan over the last 10 to 12 years. When Federal Reserve Chairman Ben Bernanke testified before the Senate Banking, Housing and Urban Affairs Committee on July 21, 2010, he told senators that the economic outlook was unusually uncertain, sending shock waves through the equity market. Many institutional investors currently believe the Federal Reserve will raise interest rates during the second or third quarter of 2011. The futures markets also reflect those sentiments. As of late July 2010, CME Group Fed Funds futures were pricing in about a 76 percent chance of a 25 basis point hike sometime before July 2011. Mary Sirois, a market maker in CME Groups Fed Funds futures, expects that when the Federal Reserve begins to move, trading will become active in a number of contract prices. CME Group data showed that as of June 2010, the majority of liquidity in Fed Funds Futures could be found in the near-term months: June 2010, July 2010 and August 2010. When the Feds moving, were rocking too, says Sirois. It is all relative though. CME Group research shows that in the bigger picture, trading has been strong in short-term interest rate products. Volume in CME Groups benchmark Eurodollar complex was up 39 percent through the end of May compared to the same period in 2009. And in the 30-Day Fed Funds complex futures were up 80 percent with options up an impressive 195 percent.

FEDWATCH TOOL FOR IR TOOLBOX

Fed Funds Futures Liquidity Top of the Book Liquidity by Contract Month Fed Funds Futures Average Size of Best Bid/Ask,Globex RTH June 1-30, 2010
3,000 2,500 2,000 1,500 1,000 500 0

CME Group Federal Funds futures have become a favorite product of market participants wishing to hedge interest rate risk or get a read on near-term interest rate expectations. Earlier this year, CME Group launched a new FedWatch tool that calculates the rate expectations priced into any given Fed Funds futures contract. A price quote in CME Group Fed Funds futures is 100 minus the average daily effective Fed Funds rate for the delivery month. The FedWatch tool, introduced just ahead of the April 28, 2010, Federal Open Market Committee meeting, performs the calculation and updates every 10 minutes. Until October 1988, the specific sources of changes in short-term interest rate forecasts were difficult to identify because financial market forecasters relied on the yields on short-term Treasury securities as their benchmark. Although changes in shortterm rates were affected by anticipated Federal Reserve policy actions, interest rate movements were also impacted by changes in expected inflation, Treasury refunding plans and other variables. What happened in 1988 to change things? The 30-day Fed Funds futures began trading. It was in the 10 years that followed that the contracts really started to become widely used by market participants as a hedging tool and to get a read on near-term interest rate expectations. However, interest in the calculations has again grown due to continued economic uncertainty and the FedWatch tool was born. The FedWatch tool is available at http://www.cmegroup.com/ trading/interest-rates/fed-funds.html

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INTEREST RATE OUTLOOK: LOW AND SLOW

Interest rates may be at record lows, but there appears to be a consensus among central bank watchers that there is not enough growth to alter the rate picture, yet. Here is what leading economists see coming.

Central banks responded to the 2008 market turmoil in classic fashion by slashing interest rates. The question now, in the midst of economic uncertainty in the European Union and elsewhere, is simply when will they head up again? In December 2008 the Federal Reserve shifted its target rate down to 0.25 percent, followed in the spring of 2009 by the Bank of England at 0.5 percent and the European Central Bank at 1 percent. While the world economies have improved significantly since the darkest days of the crisis, rates sat unchanged for over a year. As the road to recovery continues, interest rates may start to move at a different pace, but how fast and how dramatically is a matter of some debate. Terrence Belton, global head of fixed income strategy for JPMorgan Securities, forecasts low rates ahead with central banks globally keeping policy rates at very low levels. Mostly what is driving that is the slack built up in the recession and that slack is causing disinflationary pressures, Belton says. Because the deflation risks are bigger than the inflation risks, that will keep central banks policy rates low. Belton is not the only one who feels that way. Despite some brief flashes particularly when rising inventories boosted gross domestic product (GDP) to better than expected levels interest rate futures at mid-summer at CME Group indicated that market participants are expecting rates to remain at current levels into 2011 and 2012. Nonetheless, there are key factors to watch which may accelerate the rise of interest rates in the coming months.
UNEMPLOYMENT LINES

For Fed watchers, the primary indicator has become monthly unemployment claims. With U.S. unemployment at 9.5 percent, its highest average since the 1982 to 1983 recession, consumer spending, a fundamental driver of the U.S. economy, is under pressure. You need a pretty strong labor market to turn the situation around simply because that will create a little more growth and more final demand, explains Lou Brien, economic strategist at DRW Trading Group. Right now, even with several consecutive quarters of growth, most of that has been from inventory building. Real, final sales are very lackluster, just up 1 percent or so.

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GLOBAL INSIGHT

One sign that this path could be changing, Belton points out, is if jobless claims fall to the low 400,000 range in tandem with job creation rising to 200,000 to 300,000 a month. Otherwise, he anticipates little Federal Reserve rate action before the fourth quarter. Of some concern is that high consumer indebtedness may continue to cap spending even as joblessness improves. Household debt to income is now about 110 percent, up from less than 80 percent at the beginning of last decade, Brien says. Consumer credit month after month has been declining also, showing a de-leveraging rather than a desire to increase the debt load. Taking that into account with unemployment and other factors means it is too soon to speculate when the Federal Reserve may raise rates, he contends. Keeping a cap on interest rates is what Brien terms a flight to quantity. While federal debt issuance is running at a $1.5 trillion annualized rate, a decline in mortgage-backed security creation, commercial paper and consumer debt-backed products means that institutional buyers of debt have had to turn increasingly to the U.S. Treasury market, keeping federal debt prices high, and in turn, interest rate pressure low. Even in such an environment, others see tentative signs of growth and potential rate pressure. Michael Pond, director and interest rate strategist at Barclays Capital, falls on the bullish side. If consumers have more money in their pocket they are likely to spend, Pond says. With the boost in GDP from inventories likely to fade going forward, you really need consumer spending to take over.

NOT SO GREAT BRITAIN

As in the United States, unemployment is a top indicator being watched in the United Kingdom. While the countrys GDP growth at a recent 0.5 percent has lagged behind the United States, it compares well to the rest of Europe, says Phil Tyson, head of strategy for interest rate products at MF Global, U.K. Unfortunately, the United Kingdom may still take a turn for the worse before it gets better as the massive fiscal squeeze the most severe in the G-7 starts to kick in, he warns. Public sector job cuts will ensure that unemployment starts rising again which will maintain significant downward pressure on pay growth, Tyson says. Adding to the concerns over the U.K. recovery is the fact that consumer indebtedness, at $2.3 trillion (1.1 trillion), exceeds what the nation produces in a year, meaning there is unlikely to be a burst in individual spending to infuse life into the economy. Overall, the result will be no monetary tightening as GDP growth will be held to 1 percent to 1.5 percent for 2010 and 2011. More likely to come from the Bank of England will be rate cuts to try firming the British economys unsteady legs, Tyson adds.
AILING EUROPE

Adding to the United Kingdoms woes is the fact that a faltering Eurozone recovery will affect U.K. exports, pressuring businesses there even more. For the European Union itself, while joblessness and consumer spending are factors in predicting rates, there remain more troublesome concerns over the health of Europes financial institutions.

If consumers have more money in their pocket they are likely to spend. With the boost in GDP from inventories likely to fade going forward, you really need consumer spending to take over.
Michael Pond, Barclays Capital

Contrary to some predictions that the trauma of the crisis and tighter credit would spur high savings levels, Pond believes spending will come faster than expected if the labor force strengthens. One of the biggest factors that drives the savings decision is interest rates, he says, adding that when consumers last had a high rate of savings, in the early 1980s, rates ranged from 12 percent to 20.5 percent, a world apart from todays environment of what is effectively zero, Pond argues. Adding to expectations of improved spending and pricing power are indications through private surveys like REIS Inc. that rent and equivalents, which make up about 40 percent of the core consumer price index, have been rising even as federal data says they are not. Pond says the federal survey lags reality on rents and equivalents by three to six months. Still, Pond is not predicting a swift return of higher rates. By years end, he sees the 10-year U.S. Treasury notes shifting into a higher interest rate range, but with little chance of Federal Reserve action on rates themselves. Even if stronger growth emerges, Pond and others believe the Federal Reserve will seek to avoid repeating the Japanese stagflation errors of raising rates too soon in recovery. The Fed views inflation asymmetrically, he explains. They tend to be very patient when inflation is above their target and very aggressive when inflation is running below their target.

Recent industrial data has given the impression that recovery in the sector remains on track, Tyson says. The data, however, mask growing divergencies within the region as a whole where peripheral economies are still lagging badly behind. Strong exporters, like Germany, should benefit from a weaker euro. But other, less robust European economies will find any export boost hammered down by strict austerity measures, the effects of which are just starting to be seen in business and consumer activity. For the European Union as a whole, this means inflation will hover close to zero for the foreseeable future while the European Central Bank continues to try and wrangle with serious sovereign risk and banking concerns while avoiding the very real risk of slipping back into recession. At best, look for the Eurozone to post GDP growth of 1 percent in 2010 while weakening again next year, Tyson predicts.The overall global weakness further increases the likelihood that rates will remain low for some time, says JPMorgans Belton. A good rule of thumb is that whatever you lost in GDP during a recession, the first year out GDP grows twice that. That has not happened in any of the major economies this time, with the growth perhaps one-third of what would have been expected, he explains. There is trend-like growth, but it is not enough to remove the economic slack, Belton says. And that, it appears, will support low rates for some time.

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A risk tamed is a reward captured.

M I C H A EL PLATT

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For Michael Platt, nothing reduces the threat of risk like CME Group. As founder of Europes third largest hedge fund, BlueCrest Capital Management, Michael relies on the assurance and innovation of CME Group to protect and manage a $22 billion portfolio. With unparalleled liquidity, transparency and speed, and the security of central counterparty clearing, CME Group guarantees the soundness of every trade. Thats why CME Group is where the world comes to manage risk. Learn more at cmegroup.com.
CME Group is a trademark of CME Group Inc. The Globe logo, CME, Chicago Mercantile Exchange, E-mini and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange Inc. COMEX is a trademark of Commodity Exchange Inc. All other trademarks are the property of their respective owners. Copyright 2010 CME Group. All rights reserved.

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GUEST COLUMN

WHAT IS STATE CAPITALISM?

State capitalism is not an ideology. It is not simply communism by another name or an updated form of central planning. It embraces capitalism, but for its own purpose.

State capitalism is a system in which the state dominates markets, primarily for political gain. But the division between state-capitalist and free-market countries is not always clear. There is no iron curtain separating the two sides neatly into opposing camps. Every country on Earth features both direct government involvement in regulating economic activity and some market exchange that exists beyond the states reach. No countrys economy is either purely state capitalist or purely free-market driven, and the degree of government intervention within each country fluctuates over time. That said, there are crucial differences among countries in how their governments regulate commercial activity and in their power to extend their influence. The illustration above will help put state capitalism in context. It represents what we might call the entire market spectrum. At each end are the ideological extremes of a states role in an economy. On the far left is utopian communism, with absolutely no free-market activity. It is a game in which the referees have absolute control of every players every move. The extreme has never existed, because even in the most tightly controlled state, black markets generate supply to meet demand. On the far right is utopian libertarianism, which some call anarcho-capitalism. At this extreme, there is no government and no other authority that can manage, regulate or interfere in any way with the operation of markets. It is a game with no referee.
THE STATE-CAPITALIST CAMP

There are two fundamental differences between free-market and state capitalism. First, policy makers do not embrace state capitalism as a temporary series of steps meant to rebuild a shattered economy or to jump-start an economy out of recession.
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It is a strategic long-term policy choice. Second, state capitalists see markets primarily as a tool that serves national interests, or at least those of the ruling elites, rather than as an engine for opportunity for the individual. State capitalists use markets to extend their own political and economic leverage both within society and on the international stage. State capitalism is not an ideology. It is not simply communism by another name or an updated form of central planning. It embraces capitalism, but for its own purpose. Many of its practitioners came of age within authoritarian political and economic systems, where governance is the art of risk management. In such a system, power is an all-or-nothing proposition, and the outcomes of all the various political and economic games they play can determine their very survival. Faced with such a game, it is best to control both the referee and the strongest players. There is no single model of state capitalism, though its leading practitioners share a well-developed sense of risk aversion. It is no accident that the two most internationally influential of them are China and Russia, countries that have only recently shed communism and embraced markets. Fear of chaos long predates communism in China, and a tradition of secrecy and centralized control has shaped Russian political life for centuries. It is little wonder, then, that when governments in Beijing and Moscow finally decide to welcome the increasingly free flow of ideas, information, people, money, goods and services from beyond their borders, they would try their best to control these processes and to carefully micromanage the risks they create. This organic relationship between state capitalism and autocracy is also visible within the Arab monarchies of the Persian Gulf, where personal, political and commercial interests are tightly inter-

MARKET SPECTRUM Command economies Free-market economies

Utopian communism

State capitalism

Free-market capitalism

Utopian libertarianism

woven within royal families. It is also visible in energy-rich authoritarian states like Iran, Venezuela and others.
THE CHALLENGE

Though state capitalisms challenge to free markets will not generate the drama of the Berlin airlift or the Cuban missile crisis, it can compromise a countrys security and the future of the global economy. With mercantilism a thing of the past, few now doubt that commerce can generate new wealth and expand more than one economy at a time. The end of the Cold War and the growth of emerging-market states like China, India, Russia, Brazil and others have created new opportunities for precisely that kind of mutually profitable exchange. The willingness of politicians in a growing number of developing states to gamble on greater openness to foreign trade and investment has brought hundreds of millions of new players into the global economy. The Western financial crisis and global recession have left champions of freemarket capitalism facing an increasingly skeptical international audience. Countries like state-capitalist China (and those with a relatively smaller stake in international trade, like India and Egypt) have taken a much less severe hit from the slowdown than free-market powers in America and Europe. With the rise of the rest, these and other developing states have cut into U.S. political, economic and cultural hegemony over the past several years, and Washington has seen its great-power advantages begin to shrink, at least on a relative basis. If all these emerging powers embrace free-market capitalism, America might still hold a somewhat smaller piece of a much bigger pie. The risk for the United States and for free-market democracies generally is that distortions created by state capitalism will ensure that the pie is

not expanding quickly enough to accommodate all the new mouths it will soon be expected to feed. That will threaten not just standards of living, but eventually perhaps the security of the worlds freemarket democracies. Even if state capitalism is not around a century from now, the financial crisis and the global recession have ensured that it will enjoy many more years of robust health. American-style free-market capitalism and the idea of globalization have taken plenty of blame for the meltdown. Develop-

Even if state capitalism is not around a century from now, the financial crisis and the global recession have ensured that it will enjoy many more years of robust health.

ing states that opened themselves to trade and foreign investment took an especially tough hit, while those like India, Poland and Egypt that are less dependent on crossborder financial flows weathered the storm with fewer lasting problems. Outside of these exceptions, international investment in the developing world has slowed considerably during the crisis. In 2008, emerging markets took in $461 billion in net positive capital inflows. As of this writing, 2009 figures were expected to fall to $165 billion. A February 2009 World Bank report estimated that 53 million people in

emerging-market countries would slide back into poverty over the course of that year. Trade barriers have risen, protectionism has intensified, and large numbers of immigrant workers have returned to their home countries. Meanwhile, state capitalists, particularly in China, continued to invest. In 2008, for example, national oil and gas companies and emerging-market-based sovereign wealth funds accounted for a record 15 percent of global mergers and acquisitions and six of the 10 largest asset deals. There is more than one model of freemarket capitalism and Americans and Europeans often argue over the relative merits of their own versions. The U.S./Anglo-Saxon model grew from mistrust of any system that gives government too much power. The European social-democratic model relies more on the state as guardian of the rights of the individual. Relatively speaking, it favors safeguards for workers over protections for employers. This can slow growth rates over time, but it provides a wider social safety net when things go wrong. Different as they are, the two models share a core assumption: that the private sector, not the state, must be the primary engine of economic expansion if growth is to be strong and sustainable. Yet the difference between free market capitalism and state capitalism is a fundamental one. The former recognizes that government can help enable growth, while the latter asserts that government-managed growth can further empower government. For all the reasons outlined, state capitalism limits the global free market systems productive potential. That is why it is important that those who believe in free-market capitalism continue to practice what they preach.

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Photo: Ondrej Host / Filmservice a.s.

KAREL JANECEK

Chief Executive Officer, RSJ

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When traders think of cutting-edge, high-speed market making firms, they likely would not mention the name RSJ. But this Prague-based firm has quietly risen to be among the top volume participants at CME Group. How the trading world has changed.

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CUSTOMER CONNECTIONS

The interesting thing about todays global markets is that the new big players are coming from locations never imagined. It used to be ambitious and bright individuals would journey to financial hubs in Chicago, New York and London to stake their claim in the financial markets. No longer. With the growth of electronic markets and the ease of access to electronic trading engines such as the CME Globex electronic trading platform, firms like RSJ in Prague are making a name for themselves.

Founded in 1994 by Karel Janecek, RSJ was launched as a small stock trading operation in Plze, Czech Republic, a town better known for its beer. By 2000, the firm was based in Prague and began trading futures in Europe, and in 2004 making markets. In 2008, Janeceks relatively small group became a market maker at CME Group in Eurodollar futures and the E-mini S&P 500 index futures. Today the firm is the largest proprietary trading firm in the Czech Republic and ranks third among CME Group market participants in terms of volume traded on the exchange. It also is among the top three in Eurodollar futures volume. Over the past year, RSJ reported that its trading volume on CME Group had more than doubled, from 11.7 million contracts in the third quarter 2009, to 26.9 million contracts in the second quarter 2010. We started trading in the derivatives markets, doing carry trades on the yield curve through short-term interest rates on a trading program I created, says Janecek, who also serves on the faculty of Charles University in Prague, where he teaches a graduate-level course in financial mathematics. The system is still working today. In an example of how global financial markets have evolved in recent years, RSJs story illustrates just how a confluence of technology, infrastructure and talent is shaping the futures industry. In 2001 and 2002, RSJ performed its trading manually on other markets. But that was when electronic trading was still in its relative infancy. We were lucky. Today, wed be quickly out of business, Janecek says. Then we began to develop software for automated trading for market making. RSJ adapted to the new high-speed markets and, in 2007, it became a fullequity member of CME and began making markets in Eurodollar futures the following year. The designation gave the firm better access to CME Group products and opened the door to trade much more volume. Andrew Chart, head of the professional trading group business in Europe and the Middle East at Newedge Group in London, says firms like RSJ have been brought into the mainstream derivatives space, as opposed to remaining in their own domestic markets, by the continuous upgrades to trading engines and networks by exchanges, as well as the ongoing telecommunications infrastructure improvements within some of these countries. Years ago, firms in that region werent well known, werent well regulated and it was also difficult for them to get credit lines and be onboard with Western institutions, says Chart, who has been working in Central and Eastern European regions for Newedge for 11 years. Thats changed, and the more global the business has become, the more recognized these firms have become. Chart adds that the technology improvements and incentive programs for proprietary trading firms and hedge funds by CME Group have also played a large part in bringing in firms like RSJ. When we speak about Eastern Europe, telecommunications and technology are ever-evolving, Chart says. And that makes the markets more accessible as telecoms improved. But for firms in the region, its been an evolution, not a revolution.

FINDING TALENT

RSJs trading models are all mathematically-based and developed in-house. The firm outsources a fair bit of its operations to stay lean and focused on trading and making markets. Janecek says the talent pool is deep in the Czech Republic, where virtually all of its mathematicians, programmers and traders who monitor the markets, come from. Most of his 44 staff members have masters degrees or doctorates in mathematics, physics or in computer programming. Very important skills sets for us are first mathematicians, developers and programmers who understand mathematics, Janecek says. Almost all of the people we hire are recent graduates from college, so we dont actually need experienced traders. We need people to learn the way our systems work. RSJ sees no need to open offices in other locations around the world. Instead the firm uses co-location services in Chicago, London and Frankfurt. Despite its singular focus on algorithmic trading, Janecek says that speed is not the main element to its trading philosophy. Instead, the firms first priority is on building trading models that find various opportunities that are not obvious within the markets they trade. Technology is important and we dont want to be too slow, Janecek says. But it is not so important that we have to be first in line, or the fastest, because our trading is based on very complicated modeling. What is most important then is the modeling, and then using the technology such as co-location. Janecek says speed has been more important in the stock market where multiple exchanges compete for volume on the same listings. But in futures, where contracts are often exclusive to that exchange, strategy is key along with solid risk management methods. Historically, what helped us get where we are and our biggest competitive advantage, was very well done risk management, Janecek says. We trade intra-day. And at each moment, all our systems know what our risk is. And they know how to behave accordingly, based on current open positions. RSJ does not plan to stand pat with its operations or its focus on financial markets. The firm is looking to add commodity markets as well, with an early focus on energies. It is also looking at Asian markets and is considering a push into equity markets in a few years. As RSJ continues to look at the global market, Prague looks like a pretty good base to continue working from. The level of talent is similar everywhere, Janecek says. And we do have very talented, high quality people here. Newedges Chart says that RSJ serves as a good example of the potential for the Central and Eastern European region. When people read and hear about RSJ and the successes they have had, its an advertisement to other smart intellects who might want to write their own algorithm, Chart says. There are going to be local people who are born and educated within Central and Eastern Europe, who will look toward these firms like RSJ, who act as their leaders or beacons to follow.

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Time to settle some differences

Bringing fair and transparent energy trading to the Middle East and beyond

www.dubaimerc.com

KOREA EXCHANGE GOES INTERNATIONAL

Korea Exchange is one of the largest derivatives exchanges in the world. Its flagship KOSPI 200 futures and options are two of the most liquid index contracts in the world. Now with its partnership with CME Group, Korea Exchange takes another international step forward.

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PARTNER TIES

The KOSPI 200 index contracts are not just any derivatives in Korea, they are a cultural phenomenon. Few products combine widespread retail liquidity with institutional interest to such a successful extent. Korea Exchanges (KRX) KOSPI 200 futures contract was among the leading stock index futures contracts in the world in 2009 with a total volume of more than 87 million contracts traded, up 28 percent from a year earlier, according to Futures Industry Association figures. Its counterpart, the KOSPI 200 option, has been the most actively traded derivatives product in the world for years. Together, the KOSPI 200 contracts are among the most dynamic index futures and options contracts in the industry, something that Koreans are rightfully mindful of. The KOSPI 200 index was first published by the then Korea Stock Exchange in 1994. Kospi futures was launched in 1996 with options the following year. The index is indicative of the top 200 stocks at KRX. The product is like cultural heritage, which Koreans should be proud of, says Kevin Lee, managing director of Newedges Korean business. This success comes from an exchange that has been in existence for just five years. KRX was formed in January 2005 by the consolidation of the Korea Stock Exchange, Korea Futures Exchange and Korean Securities Dealers Automated Quotations. In 2010, Sun-Bong Kim, the former president of Kiwoom Securities, became KRXs chairman and chief executive officer. Headquartered in Busan, KRX is the worlds largest exchange, based on 2009 volume. Its business is split about 50/50, listed derivatives versus equities. KRXs success reflects a regional trend in which Asian listed derivatives volume grew nearly 25 percent in 2009 while volume at European and North American exchanges fell. The KOSPI 200 is far from KRXs only success story. The exchange also has thriving markets for currency futures, Korean Treasury bond futures as well as single-stock futures. The KOSPI 200 products have been growing since the futures contract was first launched by the Korea Stock Exchange in 1996,

KOSPI 200 INDEX MONTHLY VOLUME IN MILLIONS OF CONTRACTS TRADED

10 9 8 7 6 5 4 3 2 1

Jan 07

Apr 07

Jul 07

Oct 07

Jan 08

Apr 08

Jul 08

Oct 08

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Apr 09

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The exchange also has thriving markets for currency futures, Korean Treasury bond futures as well as single-stock futures
followed in 1997 by the options product. In recent years, the exchange has been working with a variety of Asian and global exchanges such as CME Group on technology, products and distribution networks. Average monthly trading volume for the KOSPI 200 futures in the first half of 2010 totaled well over 7 million contracts (see chart). Given the larger size of the futures contract, that equates to nearly 40 million KOSPI 200 options in cash value.
MARKET ACCESS

more than 33 percent of trading volume in the KOSPI 200 futures and options. Analysts say there are compelling reasons for wanting that exposure. Seok Yun, head of research at the Korean operation of Credit Suisse, expects corporate profitability to remain high and the market to remain strong well into 2011. The U.S. economy continues to steadily improve and commodity prices have been stable, which historically have turned out to be key boon factors for South Korean exporters, Yun says. To attract more international participation, KRX partnered with CME Group to offer KOSPI 200 futures, after Korean hours, on the CME Globex electronic trading platform. Launched in November 2009, existing KRX clearing members are able to access after-hours CME Globex trading in the contract via the Korean exchanges Unified System for Global Trading. The partnership now provides a global distribution network for the KOSPI 200 futures as well as virtual 24-hour access to the contract. CME Group and KRX are also planning to add a two-way order routing system, subject to regulatory approvals. A similar agreement between CME Group and BM&FBOVESPA helped boost international volume on the Brazilian market substantially and today accounts for more than 25 percent of trading on its stock index futures. In July 2010, Credit Suisse and Merrill Lynch began offering access to after-hours KOSPI 200 futures on CME Globex while a third, Newedge Group, joined them in August. Another five Korean firms currently offer or are planning to offer access to CME Globex to customers.
TAX ISSUES

The KOSPI 200 success story is often painted as one driven by an unusual level of retail interest and indeed retail clearly has a big part to play. KRX figures show about 30 percent of total volume in KOSPI 200 futures contracts comes from retail market participants with the options-specific market share likely to be somewhat higher. But KRX would like to see more international trading from institutional players. Last year, KRX says that offshore firms represented

However, the future is not cloudless for the Korean futures and options business. Following a proposal from the ruling Grand National Party in August 2009, legislators have agreed to impose a tax on derivatives, including futures and options, from 2013 with the basic rate to be set at 0.01 percent. While the bill still requires approval from the National Assemblys Legislation and Judiciary Committee before taking effect, traders are concerned. Slapping a tax on futures and options trading would increase costs, forcing many investors to leave the market and driving down trading volume, argues Lee.

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Apr 10

G O T A N E Y Y O E O U
At a time when traders may be feeling more pressure than ever to boost returns and the prevalence of electronic trading is hastening already fastmoving markets, it is no surprise that more trading firms are using market surveillance technology to help them keep a closer eye on traders.

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CUTTING EDGE

The complexity of todays trading is creating more opportunities for firms like NICE Actimize, RedKite Consulting and SMARTS Group These firms offer systems that can look for even small irregularities throughout the trading process and across a range of variables.

Market surveillance technology, long used by regulators and exchanges to monitor trading, is becoming commonplace with trading firms to track their traders and customers dealings. Why? In todays market, winning and losing trades are often the difference of milliseconds. With such intense competition, firms are now protecting themselves against potentially manipulative or unethical trading activity using technology that tracks even the subtlest of schemes. A strong driver of this trend comes from regulators in the United States, Europe and elsewhere, who have been more aggressively pursuing market manipulation over the past couple of years. Jim Heinzman, managing director of securities markets products at NICE Actimize, says firms focused on energy trading, in particular, are facing more pressure and prescriptive rules to filter out bad wash trades. And regulators promulgate through enforcement, Heinzman says. They have a big stick and they use it. You dont want to be the firm that gets a $300 million fine. Hence, market surveillance solutions are becoming more popular among trading firms seeking to not only keep brokers in line but avoid fines that can result from even the appearance of lax monitoring and compliance. Trading firms have the duty to supervise their employees and monitor the customers to whom they grant access, says Jim Moran, director and global head, strategy and technology initiatives at CME Group. In addition to risk management, trading firms that want to apply best practices are increasingly investing in surveillance systems to examine client activity for potential violative trading. Heinzman says he has had a number of commodities market-making firms become our customers in recent months to protect against the potential regulatory and reputational damage if they miss a manipulative incident. Seven of the countrys top 10 investment banks use NICE Actimize surveillance technology. Indeed, research firm Aite Group noted in a recent report that, despite significant cutbacks in information technology spending in many segments, U.S. financial firms are increasing spending on risk management technology, making that segment and trade processing their biggest spending priorities. U.S. trading firms are not alone. Tabb Group, a financial markets research and consulting firm, reported that Europ-ean brokers would increase spending on surveillance systems by 15 percent per year up to $131.5 million (101 million) in 2012. That is faster than the 11 percent annual rate that European exchanges

or multilateral trading facilities are expected to increase their spending on market surveillance technology, which Tabb Group projects will hit $113.3 million (84 million) in two years. ROOTING IT OUT In the past, many trading firms and exchanges relied on their own in-house solutions to monitor potential wrong-doing. But the complexity of todays trading is creating more opportunities for firms like NICE Actimize, RedKite Consulting and SMARTS Group, which Nasdaq OMX Group announced it will acquire in the third quarter this year. These firms offer systems that can look for even small irregularities throughout the trading process and across a range of variables. Defining and identifying the various forms of order book manipulation has had some scrutiny of late, says Michael Karbouris, head of SMARTS Group for the Americas. Karbouris shares some order book manipulation scenarios that are monitored by SMARTS.broker, the firms market surveillance system for brokers. Recent focus in this area has been on layering of the order book and another scenario called spoofing. Layering of the order book is a trading pattern whereby multiple orders are placed at various price levels on one side of the market without intending to actually trade, with the intention of creating a misleading appearance of volume, and therefore demand, in the order book. Spoofing occurs when a trader enters a large order close to priority bid or ask and then within a short period of time deletes it. The intention is to create a false or misleading appearance of demand for a contract. According to Karbouris, the SMARTS.broker platform also identifies subtle combinations of layering and spoofing, whereby a trader layers the order book on one side of the market, commences the execution of trades on the opposite side of the market and then soon after removes the layered orders from the order book. Karbouris adds that SMARTS.broker routinely identifies other common market manipulation scenarios such as marking the close and wash trades, which can be filtered to identify only those wash trades exhibiting bids and asks that originate from the same office or desk, and identify where patterns of these scenarios are developing over time. And while market surveillance technology has progressed greatly, both in terms of broader usage and greater sophistication, industry insiders believe that forthcoming regulations will drive it to expand even faster in months to come. The trend will accelerate, Heinzman says. The new financial reform act is going to impose many more requirements.

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Elm Grove Wisconsin

Return to a bygone era of elegance and refined living in a meticulously restored and expanded classic 1920s English Country Estate which has been adapted for contemporary living. The finest materials blend seamlessly with vintage period features such as leaded and stained glass windows, stonework, ornamental ironwork, tile and oak floors, lighting fixtures and walnut paneled dining room. Fireplaces are in the dining room, with a firebox dating to the 1500s, library, game room, master bedroom and on the outdoor patio. There are clay tile floors in the entry foyer, dining room, four season room and library. The lower level provides separate 2 car and 3 car garages with a doggy shower in the mud room. Ideal for entertaining indoors and out, this spectacular home is situated on over 3 professionally landscaped acres in the prestigious community of Elm Grove, just minutes from Milwaukee. $3,950,000

Elkhorn Wisconsin
Nestled in the rolling terrain of Southeast Wisconsin, is a rare find of 80 private acres of kettle moraine land and over mile of pristine frontage on Lauderdale Lakes, an 850 acre chain of 4 interconnected spring fed lakes. This property has a wide variety of hyperbolic buildings & cabins with accommodations for numerous guests. There are original & restored prairies, an incredibly diverse forest, an abundance of wildlife, & a private inlet with a stunning peninsula that the Wisconsin Department of Natural Resources has called the most pristine undeveloped shoreline in Southeast Wisconsin. Ideal as a family compound, a corporate retreat or getaway, this offering represents an opportunity to own a secluded nature preserve less than 2 hours from Chicago. This truly exceptional property is remote enough, yet 15 minutes north of Lake Geneva with its wide array of fine restaurants, antique and boutique shops, spas, golf, and more. $4,300,000

Harrison Wisconsin
At the gateway to the North Woods in beautiful Harrison Hills, just minutes from Rhinelander and Tomahawk, this exceptional 5800+ square foot home is situated on 8.8 wooded acres with 1200 feet of frontage on Long Lake and Lake Buteau. With 4 bedrooms, 3.5 baths and attention to detail throughout, the main house is well suited for gracious entertaining with expansive living spaces including an impressive 1000 square foot vaulted living room with fireplace. A truly lovely master suite features a sitting area with a wet bar and fireplace. There are panoramic views of the woods and water from every room, especially the walkout garden level bedrooms. The 4th bedroom currently serves as an exercise room. Enjoy the outdoors on several large Ipe decks. Suitable for year round living, this property is also ideal for a family compound with a 900 square foot guest cottage. Additional 26+ acres with 3,800 feet of water frontage available for purchase separately. $1,250,000

Eagle River Wisconsin

Frank Lloyd Wright inspired new construction with 103 feet of sandy frontage on Planting Ground Lake, the largest and deepest of the 28 lakes of the Three Lakes and Eagle River Chain of Lakes, the worlds largest inland chain of fresh water lakes. This incredible 3 bedroom, 3.5 bath home incorporates vintage architectural features and characteristics, yet is fully suited to todays modern living. The great room has a soaring cathedral ceiling and massive stone fireplace. The spacious master suite has another stone fireplace and the sumptuous master bath has both a whirlpool & steam shower. The screened porch off the master suite faces the lake, as does the large deck. The 3+ car garage has additional storage. On almost 2 acres of land, theres a beautiful cedar and stone fence with a moderate slope to the lake and private dry boat house. This prairie style home is truly an architectural gem. $1,695,000

For more information please contact Kurt Penn: Phone 773-206-0302 or email kurt.penn@sothebysrealty.com

CURRENT PULSE
In the Palm of Your Globex
With its strategic partnership agreement with Bursa Malaysia Berhard (Bursa Malaysia), CME Group launched crude palm oil futures contracts in late May. Palm oil futures provide a trading instrument for the massive market in crude palm oil, the worlds most consumed edible oil. Each cash-settled, U.S. dollar-denominated contract is equivalent to 25 metric tons of crude palm oil. Settlement prices for the new electronically traded futures contract are based on Bursa Malaysias crude palm oil futures, the global benchmark for crude palm oil pricing. CME Groups contract allows market participants to gain more direct access to benchmark prices with virtually no foreign exchange risk and take advantage of new spreading opportunities with existing soybean oil futures. More information on Crude Palm Oil futures is available at http://www.cmegroup.com/ trading/commodities/grain-and-oilseed/ crude-palm-oil-futures.html.

Wharton Hedge Fund Conference

In June, the Wharton Hedge Fund Conference was held at CME Group New York offices. Co-hosted by the Chicago Booth Hedge Fund Network, the conference focused on commodity markets. Portfolio managers at commodity and global macro hedge funds provided insight into the state of the commodities market, prospective trends, and potential opportunities. The Wharton Hedge Fund Network brings together Wharton Business School, University of Pennsylvania alumni active in the greater hedge fund community.

Simplify It
CME Group now offers customers the SMART Click tool, a secure, web-based interface that manages multiple accounts with CME Group systems such as FirmSoft 6.0, CME Globex Credit Controls and Clearing Firm Administrator Dashboard. Now users will only have one username and password to remember for all SMART Click enabled systems, and the systems access is simplified. Users can easily maintain their own contact and profile information without any paperwork involved. Additionally, a single SMART Click username can be given access to content from multiple clearing firms and usernames can be kept even if they change clearing firms.

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CURRENT PULSE

Calgary Connection
Recently, CME Group opened a sales office in Calgary, Alberta, to focus on Canadas energy market participants and education. As demand for oil and natural gas grows, so does the need to mitigate risks associated with these products, says Joseph Raia, CME Group managing director of energy and metal products. CME Groups Calgary office will allow us to be closer to this market and to work more closely with them to better serve their needs. The opening is particularly timely with the launch of CME Groups Western Canadian Crude contracts in July 2010. Western Canadian crude oil has been a key resource for the United States for many years, and many CME Group clients are involved in the Calgary market. More information about CME Groups Canadian energy contracts can be found at http://www.cmegroup.com/trading/energy/. CME Groups Calgary office can be reached at (403) 444-6876.

The Story of Innovation

The story of CME Group is now on display at the CME Group headquarters on the executive floor corridor, waiting area and conference rooms. The historical exhibit depicts the collective experience of predecessor institutions. The exhibit illustrates the role CME Group has played in the growth of global commerce, innovation, technology and the global economy for more than a century. And it displays the people and products involved with this story using the companys extensive archives. Brochures illustrating the exhibits imagery and story are also available in the public visitor center.

Green Light
Green Exchange LLC, received regulatory approval as stand-alone market in July 2010. Contracts on emissions allowances and credits in CO2, NOX, and SO2 will be transferred to the Green Exchange but will continue to be listed for trading and clearing by NYMEX until the process is complete. Throughout the transfer process, the Green Exchange will continue to develop additional products for launch in an effort to focus on the needs of evolving regional, national, and international markets, including the U.S. compliance market. In addition to CME Group, owners of the Green Exchange Holdings LLC include Constellation NewEnergy, Credit Suisse Energy, Evolution Markets, Goldman Sachs, ICAP Energy, J.P. Morgan Ventures Energy, Morgan Stanley Capital Group, RNK Capital, Spectron Energy, TFS Energy, Tudor Investment and Vitol.

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Shouldn't you use all the tools at your disposal to access liquidity and mitigate risk in today's grain market?
Centrally cleared over-the-counter (OTC) Grain Swaps are trading. Atlas Insite provides everything you need to take advantage of every opportunity.

The advent of OTC grain swaps has made the grain market bigger, broader and more flexible than ever before. These trading vehicles allow you to access additional liquidity out the curve, eliminate physical delivery risk, execute a corn crush in a single trade, and manage price risk when the market is locked-limit or closed. To get an edge in effective price discovery and efficient deal execution of OTC grain swaps, use Atlas Insites hybrid brokerage model, which combines innovative technology with professional voice brokerage services. Its easy, convenient and practical who wouldnt want a set of tools like that? For more information, please call 713.574.5005 or email info@atlasmarkets.com.

Live. Firm. Anonymous.

AT YOUR SERVICE

FINDING GREEN IN UNEXPECTED PLACES

In todays carbon conscious world, Information Technology is focused on doing much more computing using far less energy. CME Group has certainly followed that plan.
CME Groups new data center, DC3, is the size of four NFL football fields and just as green. DC3 provides critical support to all internal and external business systems, including CME Globex, clearing and regulatory and provides continuous power and cooling to these systems. In planning and building out DC3, sustainability was the focus of three core areas: data center design, construction and operating practices. The result is an industryleading union of technology and environmental sustainability. Green efforts are usually cost effective, but as a corporate citizen, being environmentally sustainable is equally important. It benefits the entire community, says Joe Panfil, managing director of enterprise technology services at CME Group. We attempted to extend green practices into everything we did. One element is the data centers 130,000 square foot reflective white roof, which dramatically reduces roof surface temperatures, lowering cooling costs. CME Groups green construction practices include reducing waste and recycling materials. For example, 1,600 tons of concrete and roof gravel were reused during DC3 construction. This translates into a saving of 4,640 tons of carbon dioxide emissions, according to the U.S. Environmental Protection Agency waste reduction model. Additionally, more than 3,100 yards of construction debris, cardboard and steel have been sorted and recycled to date. We were also able to salvage 17 mature trees from the data construction site. We stored them at a farm during construction, and they have since been replanted along the data centers south boundary, Panfil says. The DC3 operating practices strive to improve energy efficiency of electrical and mechanical equipment. DC3 is the first CME Group data center with its own power substation, allowing power to be distributed at a much higher voltage, with better efficiency, flexibility and environmental sustainability. DC3 is adopting other technologies, such as evaporative condensing and heat recovery wheels, to promote free cooling. During the winter months, the outside temperature can cool a chilled-water system, allowing the chillers compressor to be shut down, thus

DC3 is the first CME Group data center with its own power substation, allowing power to be distributed at a much higher voltage, with better efficiency, flexibility and environmental sustainability.
reducing energy consumption more than 35 percent of the year. While green practices have obvious benefits, DC3 was also built with customer service in mind. We built the new data center using knowledge from previous builds and augment them with the latest technology in the industry. This brings a higher level of excellence to our customers in the form of reliability and performance, says Panfil. Additionally, we allowed a large amount of space for expansion. This will permit us to grow as needed to accommodate our global customers.

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The Global Solution The Global Solution

30 30

CELEBRATING THIRTY YEARS

www.cqg.com CELEBRATING THIRTY YEARS

WISH YOU WERE HERE

FUtURES AND OPtIONS AlgORItHmS tHAt SEEk tO BEAt tHE SPIkE

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