Walt Lukken, President and CEO of the Futures Industry Association (FIA), welcomed the global derivatives industry to the 48th annual Boca International Derivatives Conference, held on 14-16 March in Boca Raton, Florida.
Back in full force for the first time since Covid, the event attracted more than 40 exchanges and trading venues as well as regulators looking to take the pulse of the industry. “Things are moving so fast. And last year was not for the faint of heart”, Lukken said.
“Since the start of 2022, we have witnessed the largest military invasion in the last half century, the biggest jump in inflation since the 1980s, and the highest interest rates in 50 years. In case that wasn’t enough, we saw a historic move in the price of nickel, which almost took down a marketplace that has been operating since the 1800s”, the FIA President and CEO continued as he also mentioned the rise of crypto, the catastrophic implosion of FTX, and the recent cyber-attack against ION Markets.
In his opening remarks, Walt Lukken reminded attendees that global exchange-traded derivatives rose by 34% in trading volumes, printing records for the 4th consecutive year.
He also praised regulation and the “people in this room” who helped the industry improve in the wake of past crises, namely with customer segregation and protections, margining practices, clearing and transparency for OTC derivatives, capital requirements for brokers, and audit trails and data on trading.
‘This seems to be the “stone in the pond” moment that ripples through our industry’
One of the new challenges is resiliency and cyber risk, he commented, in the wake of the cybersecurity incident at ION a few weeks ago. The ransomware attack by the Russia-linked LockBit gang forced several European and U.S. banks to revert to manual processes. Cybercriminals threatened to leak data stolen from the company.
Seasoned risk managers were critical in helping the derivatives industry manage the disruption, he said, as he named a few, Chris Edmonds of ICE, Lee Betsill of CME, Dale Michaels of OCC, and Dmitrij Senko of Eurex.
“Our industry gathered within hours of the incident to centralize information, encourage calm, share best practices and hear each other out. By the end of the week, over 700 people were on our calls making sure our markets remained open. As I shared last week before the CFTC, I am proud of our industry’s response to this incident, and how we rose to the occasion to quickly address this challenge. Exchanges listened to customers, and CCPs kept clearing windows open when needed. There were no auto-liquidations, technical defaults or algorithms directing the situation. This was old-fashioned risk management, using human experience and judgment”, Walt Lukken said.
The recently announced formation of a Cyber Risk Taskforce is meant to tackle the cyber security challenge by pulling together market and cyber experts to analyze ways the industry can improve the resilience of the markets and work closely with regulators to ensure there are no gaps in cyber protections and business continuity procedures.
“It’s too soon to recommend specific actions after the ION disruption. But this seems to be the “stone in the pond” moment that ripples through our industry. Just as past disruptions have sharpened our focus, I’m confident we will identify new ways to reinforce the resilience of our markets and learn from this event”, he concluded.
Walt Lukken also mentioned FIA’s Derivatives Markets Institute for Standards, or DMIST, which is “taking on such sexy topics as settlement time frames, trade reference data, and average pricing for allocated trades”, with its most recent report offering ways to improve post-trade.
FIA’s Walt Lukken warns of conflicts of interest when exchanges also operate FCMs
To end his speech, Lukken warned of the trade-offs regarding disintermediation as crypto exchanges, and even traditional exchanges, have either bought or started their own FCM. Last year, CME Group applied with the CFTC after FTX’s initiative to become an FCM and drew much criticism from broker-dealers.
“While there may be operational efficiencies from a “full stack” approach, there are also trade-offs. To quote Mark Twain, if you put all your eggs in one basket, you better watch that basket. The value of an independent intermediary should not be forgotten in this debate.
“Intermediaries provide checks and balances and natural firebreaks for the derivatives ecosystem. FIA strongly supports improving operational efficiencies. But the industry and regulators must be frank about the trade-offs here. Conflicts of interest arise from putting all the functions of the trade lifecycle under one entity. We saw the consequences of that first-hand, through the demise of FTX.”