EXCLUSIVE: ‘There is embedded risk in everything we do in life’ — CME chief’s world view
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EXCLUSIVE: ‘There is embedded risk in everything we do in life’ — CME chief’s world view

From Brexit to the impact of a likely rise in US interest rates, Terry Duffy, executive chairman and president of Chicago Mercantile Exchange, offers a 360 degree view of risks and opportunities for financial markets in the US, Europe and emerging economies. By Toby Fildes

GlobalMarkets: European markets appear afraid of a Trump presidency. But how are US markets viewing the November elections?

Right now, the polls are going to be like an equity market — they’re going to fluctuate dramatically over the next several weeks.

In the long view, I don’t think the markets are going to be affected by whether Trump’s elected or not. There are a lot of other fundamental factors outside the President’s everyday activities that make markets go up and down, no matter who’s in that office.

It takes several years to set policy. So until that takes effect, the markets will have a wait-and-see attitude. We’ve just had major legislation called Dodd-Frank, so from the financial markets side, we’ve already had all the regulatory changes I think we’re going

to see for a long time.

GlobalMarkets: What does Brexit mean for the derivatives industry in Europe?

I still think London will be a central place in Europe for financial services. Brexit was just as much about border laws as it was against anything else with the Union. I think other nations are looking at the same thing. So maybe you’ll see some changes within the

Union. In the short term, there will be uncertainty to deal with.

But it’s really difficult to see how it’s going to be damaging completely towards Europe or the US. I think people will realise this is more political than economic.

GlobalMarkets: How optimistic are you about the performance of markets over the next three to six months?

The broader markets, especially the US markets, are trading on basically alltime highs. A lot of this has to do with Fed policy. People have nowhere to go but the equity markets today to get some kind of return on their money.

This interest rate policy is, in my opinion, flawed. In the US, we have a $20tr national debt; then we have $6.5tr of mortgage debt or home debt; we have $1.3tr of credit card debt; $1.2tr or $1.3tr of student loan debt, plus auto loans and everything else.

I’m trying to figure out who is going to be borrowing money to stimulate the economy when they’re already in debt. The policy, to me, appears to be putting more people in debt, not growing the economy.

And that blends to the equity markets. I’m not saying the market’s going to sell off. But unfortunately, when you get to levels — and this is my 36 years’ experience in the marketplace — whether they’re all-time highs or alltime lows, they normally have a pretty

good snap, one way or another.

GlobalMarkets: What would you have done differently?

I think the Fed has confused the marketplace. In the US, we’ve had a zero interest rate policy since 2008, 2009. The message that was delivered over the last several years is that we wanted to see certain economic factors happen before we moved rates. 

Well, those things have all happened and yet they didn’t do anything with rates. That confuses the market. In my opinion, you could’ve easily taken the rates to 1% or 2% to 3%. Stop penalising savers and retirees. Give them a return on their money. I personally believe you would have stimulated the economy a lot more by encouraging savers to start spending some money than trying to make people that already have too much debt spend more money.

GlobalMarkets: In light of recent regulator comments on the merger plans of London Stock Exchange and Deutsche Börse, how concerned should the market be that clearing houses are becoming too big to fail?

The market is not understanding that very well. The equation of clearing houses being too big to fail is if their three or four biggest clients fail. We’re talking some of the biggest institutions in the world. If they were to fail, not too many other institutions would be standing.

One of the things people don’t understand is that we don’t, as central counterparties or clearing houses, introduce risk to the system. We manage the risk that people bring to us.

So as long as we continue to do the right things to manage that risk, that fear should be allayed.

GlobalMarkets: Is it a starting gun for a wave of consolidation of exchanges?

From our standpoint, I think it’s business as usual and it’s not going to have any effect on how we operate CME Group. Will there be more consolidation? Time will tell. But regulators have gotten very difficult. They’ve already blocked a few other major transactions. Australia and Singapore — that did not go through; the Canadians blocked the sale of the Toronto Exchange.

So there’s a lot of concern about some of these entities going forward, rightly or wrongly. I’m not saying it’s right, but that’s just been the pattern over the last several years.

We’re growing our business in many different ways. It doesn’t mean we have to buy another entity. But at the same time, if there was something that could add value, we’re always keeping our eye out.

GlobalMarkets: Which emerging markets are most interesting to you?

Well, it’s hard to say what’s an emerging market any more. We own a small piece of the BM&F exchange in Brazil, and we like that investment.

I personally believe that emerging markets in general won’t have the explosive growth they’ve had in the past, but it doesn’t make them bad investments either.

China says it’s growing at 6.5% or 7%. That is hard to refute, but at the same time, it’s hard to validate. So I still think we could have a little disruption around the world. I don’t mean to sound like a pessimist, because I’m not. It’s been ultimately very good, globally.

But my biggest concern is some of the things that have happened outside the financial markets, whether it’s terrorist attacks in Paris, or in San Bernardino, California.

The financial markets have literally shaken them off, where historically they would have said that these events can’t be good for the future of markets and priced their impacts differently.

GlobalMarkets: Are we coming to the end of the great regulatory phase for derivatives?

Yes, in the US, we have. Basel III is still out there — that’s one of the things internationally we’re concerned about, because it’s going to raise the cost of business even more.

Look at the leverage ratio — money sitting in clearing houses that banks have no access to, that they still have to account for in their leverage ratios — to us it makes absolutely no sense.

The problem with markets is there’s always inherent risk. A lot of people would like to see them become riskless. But if you’re going to have a riskless business, whether it’s banking or a bakery, you’re probably not going to be successful.

There is embedded risk in everything we do in life. And I think we have to be careful not to overburden these markets to a point where they don’t allow economies to grow, because that’s when nobody will have a chance.

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