The inauguration last week of futures trading in Eurodollars and West German marks on the Chicago Mercantile Exchange and the Singapore International Monetary Exchange marks a milestone in the internationalization of the financial futures market, another step in the development of worldwide, round-the-clock markets.
For the first time, customers can buy and sell contracts interchangeably on the two countries' exchanges, which now are linked through a computerized process for settling accounts known as a mutual offset system.
The first day of trading on the two linked markets -- which opened on Thursday evening in Singapore and 9 a.m. Friday in Chicago -- produced a total of 49,000 contracts. A Chicago Merc spokesman said the trading volume exceeded expectations.
Chicago traders were responsible for most of the activity -- more than 46,000 of the contracts. Of the 2,800 contracts executed in Singapore, 663 came from Chicago overnight.
The overseas expansion of the Chicago Merc is a predictable step in the rapid growth of futures trading in this country. And it responds to the increasing sensitivity of traders to worldwide developments.
With the Chicago-Singapore connection in place, an investor in Chicago can take a position by buying a futures contract for West German marks, for instance. An investor who correctly anticipated how the price of marks would change could lock in a profit by executing a contract to sell marks 12 hours later in Singapore -- long after the Chicago market had shut down for the night.
At the end of each trading day, a customer's contracts originating in Chicago are matched up electronically with those closed in Singapore. Thus it no longer is necessary for cautious traders to take duplicate positions on both the Merc and Simex in Singapore.
Moreover, operations in different time zones (Singapore is 13 hours ahead of Chicago) double the available trading time for customers seeking to benefit from events occurring after exchange hours, such as Federal Reserve announcements affecting interest rates. They can trade by day on U.S. floors and by night on a foreign exchange half a world away as orders are electronically or telephonically routed to market makers there by Chicago brokers on the lobster shift.
Financial futures were created to protect traders against shifts in market prices. Yet they also serve speculators by offering considerable opportunity for profit -- as well as considerable risk.
The market is composed of two basic types of instruments: futures and options, plus a hybrid of the two. A futures contract obligates the buyer to buy or sell a commodity at a specified price at a fixed date. An options contract gives the investor the right to buy or sell the commodity at a given price on a given day. The hybrid allows the customer to buy or sell a futures contract. Because they are highly leveraged -- $15,000 down, for example, buys a Treasury bill contract with a face value of $10 million -- there is potential for enormous gain (or loss).
The financial community and U.S. regulators plan to monitor Merc/Simex operations closely to make sure that trading volume is large enough to protect investors and that no manipulation and other abuses occur. Some lawyers fear that Simex could be used by Americans to execute commodity tax straddles, a kind of illegal tax dodge, by declaring trading losses in this country and profits in Singapore, out of reach of U.S. tax collectors. Although Simex adopted U.S. rules -- including teaching Singaporeans used to telephone trading to wave and shout American-style in the pits -- the Commodity Futures Trading Commission has no jurisdiction over Simex.
"Just wait until the first bankruptcy" of a Singaporean firm handling U.S. clients' orders, a futures industry executive warned. Another potential impediment is disclosure. If disputes over transactions arise, U.S. regulators or litigants may have difficulties in obtaining documents from abroad.
Despite such uncertainties, industry officials predict a steady growth of international trading. By the end of this decade, Clayton Yeutter, president of the Chicago Merc, predicts that worldwide, 24-hour trading in major currencies and Eurodollars will become a reality, with an accompanying consolidation of U.S. exchanges and expansion of foreign exchanges. And contracts will become standardized -- the same size and margin requirements -- so they can be traded on many exchanges around the globe, Yeutter predicts.
There are more than 90 international commodity markets worldwide, by CFTC calculations. More are being established every day in places such as Bermuda and Rio de Janeiro, according to Futures World, an international trade publication.
Most of the new ones concentrate exclusively on financial futures, which do not require physical delivery, rather than metals or farm commodities. The bulk of the world's trading occurs on the dozen futures and five options exchanges in the United States, although 30 to 40 percent of all activity in the futures markets comes from abroad, the magazine said. An estimated 90 percent of the financial futures market is concentrated in Chicago, home of the Chicago Board of Trade, the busiest of all futures exchanges.
Outside the United States, the most important futures exchange is the London International Financial Futures Exchange (LIFFE), which will be two years old in October. The Chicago Merc, which forged the bond with Singapore, also is negotiating with LIFFE. Another such linkage is contemplated between the Commodity Exchange of New York and the Sydney Futures Exchange. The Chicago Board Options Exchange is exploring a trading relationship with the European Options Exchange in Amsterdam as well as exchanges in London and Zurich. And the Chicago Board of Trade is negotiating with the London Stock Exchange for permission to trade the Financial Times Stock Exchange 100 index.
In the first seven months of 1984, U.S. futures contracts totaled 90 million, of which 41.3 million were on financial instruments, stock indexes and foreign currency. The two most popular investments are options contracts on Standard & Poor's Index of 100 stocks and futures contracts on Treasury bonds.
There now are 14 indexes being traded, both broadly and narrowly based. Applications are pending for 43 new narrowly based indexes ranging from electronics stocks to gambling/hotel stocks, but industry interest in securing approval has waned because of an inability to digest so many new products and increasing congressional skepticism about the desirability of more such indexes. (Two commodity exchanges and more than a dozen futures products have failed in recent years.)
Further growth of futures and options markets in the United States may be affected by a congressionally mandated study being conducted by the Federal Reserve, the Securities and Exchange Commission and the CFTC. Originally scheduled for release this month, the study is now expected to be completed by the end of the year. The study will focus on whether index futures and options trading have affected capital formation by draining money away from the stock markets. In other words, does such trading serve a legitimate economic purpose of hedging against risk or is it pure speculation?