Today marks the 40th anniversary of the launch of FX (foreign exchange) futures by the CME, which is definitely a reason to pause and consider where said markets rest today. In the CME’s white paper, The Birth of FX Futures, they describe this realm’s evolution as such:
In December of 1971, under the direction of its principal architect, Leo Melamed, then chairman of the CME, the exchange chartered the International Monetary Market (IMM), an independent division specifically designed to exclusively specialize in futures trade of instruments of finance. To fully comprehend the innovative impact of the International Monetary Market on the history of markets, one must understand that from its inception the IMM represented both a specific and general revolutionary departure from traditional futures. In the narrow sense, by launching FX futures contracts, the first financially based futures product, the IMM led futures markets into the financial arena. However, in a macroeconomic sense, it represented a much more significant transformation: it ushered in the era of financial derivatives and its modern risk management applications.
The exchange attributes much of these markets’ development to the support of Milton Friedman, detailing his fight not only to have them launched, but adopted by the wider investing population. It was a bit of a challenge to convince financial players that a world that had, for decades, been relegated to the world of large bank movement, was one in which they could or should participate. However, as time has gone on, financial futures have become, in many ways, the backbone of the futures industry, boasting some of the most liquid markets in the world. These markets, however, can also be found in the center of global political tensions, as we see today with heightened concerns about Greece. The Wall Street Journal explains:
Jerky shifts in exchange rates could lie ahead as a Greece-inspired rush into the safe-haven dollar prompts some traders to warn that liquidity in the foreign-exchange market is suffering.
The buck rose across the board Wednesday, pushing other major currencies lower and hammering emerging-market currencies as investors headed for safety following Tuesday’s failure by Greek politicians to avoid fresh elections.
Some traders described conditions as “surprisingly orderly,” but others were more concerned.
“I think we’re not far away from markets becoming quite illiquid and disorderly, although for now we can get deals done, despite a lot of tension in markets,” said one trader at a large currencies-dealing bank in London.
As investors started to take the idea of a Greek euro exit more seriously, the euro plunged to four-month lows against the dollar to trade at $1.2681 and sank to a fresh 3.5-year low against sterling, trading as low as GBP0.7950. The Australian dollar was also under pressure, slipping to its lowest level against the dollar since December, to trade at $0.9883.
In a classic panicky trading pattern, emerging-market currencies swooned, with the Indian rupee sliding to record lows. Authorities in Indonesia and South Korea were suspected of intervening to support their currencies, while traders were nervous of similar action in Thailand, Malaysia and India.
While this kind of volatility may make some investors cringe, managed futures is welcoming the volatility, with several of the managers we track either
long the U.S. Dollar short the Euro (Clarke Capital Worldwide, Integrated Managed Futures Corporation, Dominion Capital, Bouchard Capital) or short the Euro long the US dollar (Covenant Capital, Auctos Capital), and benefitting (for now) from these sharp moves. Granted, past performance is not necessarily indicative of future results, and as we talked about recently, there will be many strike outs for every home run, but after 40 years, it’s fair to say that FX futures have been a boon for the asset class, opening up a wide array of trending markets for participation. You really can’t understate the significance of the impact they’ve had on global finance – and managed futures in particular – with most multi-market trend following programs boasting some exposure to FX futures.
But the thing about futures markets is that they’re never static – they are constantly evolving and growing, with new markets and market participants moving in and out of the flow over time. Who knows? Maybe 40 years from today, we’ll be celebrating the dawn of a futures markets evolution we never even saw coming.
*Edit – We originally switched the US dollar and Euro positions held by the managers we cited. We apologize for the error.