On June 18th 2010, Barry A. Goss, Founding Director of Futures Markets Research Associates (Australia) PTY LTD, gave a presentation to the Dalian Commodity Exchange entitled "Outlook for World Derivatives Markets". The presentation focused on three areas related to global futures markets: increasing regulation, consolidation of global exchanges and risk management issues. The presentation provided a number of insights into the changes futures markets have undergone, and in some cases are still undergoing, and the likely challenges in the post-financial crisis atmosphere. Dr. Goss also offered some unique perspectives regarding how China's futures markets, and the DCE in particular, might respond to the challenges and emerge in a stronger position than before.
Regulation
Dr. Goss summed up his outlook regarding regulation of the futures markets succinctly: "Expect more of it." With many investors, companies and government institutions incurring massive losses during the financial crisis of 2008 and 2009, it is inevitable that regulatory agencies around the world will soon move to more tightly regulate the derivatives industry. Dr. Goss stressed that derivatives, as risk management tools, are useful instruments that offer many benefits to their users, and some derivatives concepts, such as securitization, which recently have been subject to scrutiny, have enjoyed decades of success in other contexts. Nevertheless, some recent market events have left investors open to gigantic losses, and he expects that increased regulation will occur, especially with regards to credit rating agencies and the over-the-counter markets.
Consolidation
In the last decade, there has been a great deal of merger & acquisition activity amongst derivatives exchanges, with such prominent mergers as CME, CBOT and NYMEX; Euronext and NYSE; and NASDAQ and OMX. There were various motives for these mergers: leading players have been actively looking to enhance their positions in the market, stock exchanges have been looking to enter the derivatives trading market, and European exchanges have been seeking an entry point into the US market (and vice versa). The result of these mergers has been a reduction in the cost of liquidity and hence reduced transaction costs for the merged entity, which is an advantageous situation for investors, though perhaps an uncertain situation for small and mid-sized regional exchanges with similar, more expensive contracts.
Risk Management
Dr. Goss believes that demand for risk management facilities will likely increase in the near-to-medium term. The reasons for this are multifaceted: increased volatility in recent years, increased emphasis on risk management following the financial crisis, increased global output and other factors. There is enormous potential in developing markets for growth in risk management as the commodity and financial markets in these areas continue to develop and demand improved risk management facilities.
Dr. Goss concluded by saying that the experience of exchanges in the West has shown that it was necessary for exchanges to ensure that they are meeting the needs of the market by providing products that serve their intended markets, that their products are suitable to both buyers and sellers, and that they do not incur too many transaction costs which might push customers onto exchanges in other markets. He also offered some interesting research topics that the exchange, as well as graduate students studying futures markets, might research in the future such as the reasons behind the situation in the Chinese futures market where the most active contract appears in the mid-to-long term (six to nine months from maturity), as compared to futures market in the West where the most active contract is usually less than three months from expiration. The presentation was attended by over 100 guests and was followed up with a lively Q&A session.
Barry A. Goss is the Founding Director of Futures Markets Research Associates (Australia) PTY LTD, (FMRA) a group of professional economists with a major interest in the analysis of futures markets. Their previous research covers futures markets in U.S.A., U.K., Asia and Australia, and includes markets for agricultural commodities, energy, non-ferrous metals, precious metals, live stock, currencies and other financial futures markets. Previous professional activities of members of FMRA include consulting to international organizations, feasibility studies for a new futures exchange and new futures contracts, the development and estimation of research models of futures markets, organization of futures conferences, and publication of books and reports on futures markets. Current activities include education programs on futures markets, proposals for new financial products including indices and liquidity derivatives, a model of the copper futures market, and a strong focus on Chinese futures markets.
