Now with added derivatives

Spent an interesting week in Boca Raton at the FIA’s annual conference which brings together the top executives from the global futures industry to debate what lies ahead. The event had extra spice this year as the recent wave of merger mania in the exchange space has placed a high premium on those venues that have – or that can create – a derivatives capability. Because derivatives exchanges own the products being traded, rather than simply providing a marketplace, derivatives venues are better able to protect margins and fight off competitors than their equities-only counterparts. Just look at the success of CBOE’s VIX contract which is now widely regarded as a universal (and tradable) fear gauge of overall financial market sentiment.

This fact helps explain why derivatives are becoming such an important part of the changing exchange landscape. And of course they are attracting their own share of regulatory attention with plans afoot to move the OTC market onto exchange and increase its overall regulatory transparency. In Europe especially, the potential merger between Deutsche Börse and NYSE Euronext would combine both the Liffe and Eurex markets into a potent force. Maybe the price for allowing the merger to go ahead will be that some sort of fungibility (or other clearing compatibility) is mandated by Brussels. If that were to happen then expect every venue to launch its own variant of the major derivatives contracts.