By next spring, U.S. investors could trade gold and foreign currencies in the middle of the night without paying a premium for the privilege if the Commodity Futures Trading Commission approves an agreement between the Chicago Mercantile Exchange and the Gold Exchange of Singapore.
Leo Melamed, special counsel to the Merc and its prime mover, said he thinks the idea's time has come.
The CFTC chairman, Susan Phillips, said she thinks the concept is a good one, but that the commission must review the Chicago-Singapore agreement carefully before ruling on it.
"The exchange hasn't formally submitted anything to us yet, but I understand that some of their staff will be coming into Washington to brief some of the staff of the commission in a couple of weeks," Phillips said. She also said she understands that the exchanges have not completed negotiations.
Melamed, however, said an agreement in principle was reached in July and a mutual letter of intent was signed in late August.
"We hope the CFTC looks kindly on this. I think we've proved during the last decade that our International Monetary Market has become one of the most innovative business tools in existence," he said. "And during the last three or four years, the commission has proved its competence and shown that it can handle processes and innovation.
"Twenty-four-hour trading has become a way of life. It was inevitable that somebody would entertain international trading for this futures market and, except for the Chicago Board of Trade, nobody but us had the ability to take that step right now."
Phillips agreed with Melamed's sentiments.
"I think that it's a natural step in the evolution of the market. The market has been international in scope from the start. Improved information technology and communications exist to make such trading much more possible," she said.
The Chicago-Singapore link would not offer 24-hour trading right away, but it would begin with 12 hours of trading time, six during the day and six at night. U.S. traders would be able to gain access to the Chicago floor between 8 a.m. and 2 p.m., Chicago time, and then trade on the Singapore floor during that country's normal business hours, which translate to 10 p.m. to 4 a.m., Chicago time.
A European link with the London International Financial Futures Exchange (LIFFE) would provide a third trading period and bring gold, Eurodollars and the yen closer to a 24-hour schedule. Melamed said a LIFFE link with Chicago and Singapore is being seriously discussed.
He acknowledged that currency futures trading is possible around the clock now, but said that it is very expensive, because it involves four distinct trades. If it takes place between Chicago and Singapore, the U.S. trader has to buy at the offer price in the Chicago market, sell at the bid price in the Singapore market, sell at the bid price in the Chicago market and buy at the offer price in the Singapore market.
"Not only do you have to pay margins twice and commissions twice, but you also have to double the extra amount you would normally pay, because a seller expects you to buy at a premium and a buyer expects you to sell at a discount," Melamed said.
"It's difficult for a trader to trade internationally now because there's no futures market at the equivalent level of what we're proposing in terms of liquidity, volume and breadth."
The link would create two clearing companies at either end and, in Singapore, it would create a market identical to Chicago's. The types of contracts would be the same and so would the market's size and specifications.
"They would offset each other exactly," Melamed said. "If you were long here, you would automatically be short there."
The Gold Exchange of Singapore would become a new, larger, more liquid Singapore Financial Futures Exchange (SFFE), which helps to explain why both the GES and the Monetary Authority of Singapore apparently are enthusiastic about the proposal.
"Singapore needed our market to create theirs," Melamed said. "It's also to the benefit of the American market. It means more business for us; a more favorable balance of payments. Thirty-three percent of the U.S. futures business now comes from Europe but very little comes from Asia. You figure there are about $2 billion in futures deposits here right now, and take a third of that, and that's a lot of money."
He admits that the mechanism involving two clearing entities could complicate the mechanics of the arrangement, but he maintains that a solution exists.
"I think we've come up with a simple, safe methodology for trading. The simplest way would be for Singapore trades that offset each other to stay in Singapore, and Chicago trades that offset each other to stay in Chicago. It's simple in theory, but like all theories, it needs testing."
To help ensure CFTC approval, the Merc insisted that Singapore adopt CFTC regulatory practices such as the financial segregation of customer accounts, common bonding and the use of gross margins instead of net margins.
Phillips, however, sounded more concerned about the effectiveness of the contractual arrangement than whether or not it would live up to regulatory requirements. She pointed to a recent link between the Chicago Board of Trade and the Kansas City Board of Trade that began last spring but fizzled.
Walter Vernon, president of the Kansas City BOT, says it was a matter of marketing.
"What we did was, we actually created a new class of membership for Chicago people who wanted to become members of the Kansas City Board of Trade. We leased space at the Chicago Board of Trade and agreed that we would pay for the pit crews, the reporting and the surveillance, with Chicago people actually doing the surveillance.
"Well, we did trade for a time but we had a hybrid product that needed explaining, and we don't think it was properly supported by the Chicago Board of Trade. I'm sure they'd tell you something different, but clearly they didn't do any marketing of any significance, and eventually it's going to go off the boards," Vernon said.
"Now, I don't have to tell Leo Melamed how to market a product. He doesn't need any advice from me on marketing."