Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad streets in New York city, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision in global business. The dream drivers that have made the NYSE an indispensable institution for global growth for more than 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism right here, right now at the NYSE and at ICE's 12 exchanges and seven clearing houses around the world. Now, here's your host, Josh King, Head of Communications at Intercontinental Exchange.
Josh King:
Today, we're taking the Ice House to warmer climbs than New York, coming to you from Boca Raton, Florida, home of the 43rd Annual International Futures Industry Conference known as FIA Boca. The FIA brings together the leaders and pioneers of the futures, options, and derivatives markets. This week, we're listening to industry heavyweights and sitting in on the sessions, bringing Ice House listeners behind the scenes. The impresario of this event is Walt Lukken, President and CEO of FIA. He plays host to participants here hailing from 47 countries, but he let us take a peek behind the curtain earlier this week, before the action started. As you listen to our conversation, note that while I'm taking the show on the road to FIA, we had some ambient noise and electronic interference in the room while we were talking with Walt. You can hear Walt's thoughts very clearly, but it won't sound quite as smooth as our quiet home in the library of the New York Stock Exchange. Our conversation with Walt Lukken, just after this.
Speaker 1:
Inside the Ice House is presented this week by ICE Future Europe and the ICE Brent Crude Oil complex. Have you ever rolled up to the pump or heard a news report on rapid changes to the price of a barrel of oil and wondered why the price is different than yesterday? Most of the world's oil is price relative. The ICE Brent complex and ICE is where a large percentage of the world's crude oil derivatives are traded.
Josh King:
For the last six years, Walt Lukken has steered the FIA through a period of increasing importance in the high tech interconnected global marketplace that underpins the world's financial activity. Walt's no stranger to navigating through complexity, having guided the Commodity Futures Trading Commission, the CFTC, through the financial crisis as its acting chairman. After seven years with the CFTC, he left Washington for a couple of years with stops at the NYSE and what would become known as ICE Futures Europe before returning to D.C. in 2012 to take the reins of FIA. Welcome to the Ice House, Walt.
Walt Lukken:
Thank you very much. Glad to be here.
Josh King:
Why don't you take us through this week? Give our listeners a vicarious chance to understand what it means to attend FIA Boca.
Walt Lukken:
We have a great week in store for us. I mean, I think we start out looking back on 10 years of the financial crisis and where we were 10 years ago, reflecting on that. But also looking forward, where are the trends that we see going forward and trying to make sure that we're keeping our eye on the prize, which is growing this industry in a safe, orderly manner. That's always going to be a topic for us, innovation and growth.
Josh King:
I want to get into those trends in a few minutes, but for our listeners who read stories each and every day about Bitcoin and the rise, fall, rise and fall again of cryptocurrencies, a big draw this week has to be Cameron and Tyler Winklevoss, the founders of the digital asset exchange, Gemini, covering the development of the emerging asset class and its potential for the future.
Walt Lukken:
I think they'll bring a compelling case for the need and desire for cryptocurrencies. We heard them speak in Singapore at our conference there, and I think it was the first time that I sort of opened my eyes to the benefits potentially of cryptocurrencies going forward. We forget, but cryptocurrencies began after the financial crisis, when there was a strong desire for decentralized way of payment structure, and it's a relatively new form of monetary form. But so far, obviously, the growth of cryptocurrencies, there's a lot of potential pitfalls there. But we have to keep our eyes more on the long term prize of where this is taking us and where the benefits may be as well.
Josh King:
Back in Singapore, Bitcoin had its ups and downs to say the least, is there too much volatility still in cryptocurrencies to be able to assess future risks?
Walt Lukken:
Well, our markets are meant to be price discovery markets, and that's why they exist. And so they allow the collective views of people who are trading those products to come to a centralized place and be heard. So, yes, there's going to be volatility. I think people have to be aware that volatility may involve losing money. But the important thing is giving people a central place to express their views on the prices of commodities, whether that's oil, whether that's currencies, whether that's assets or securities. In this case, cryptocurrencies are a new form of an asset.
Josh King:
Maybe the evolving narrative that we've been reading in recent months is that while Bitcoin and other cryptocurrencies may come and go. The underlying technology, blockchain, with its transparent ledger could be the catalyst to transform not only this but other industries as well. The back office isn't sexy, but it's the engineering that makes risk management work.
Walt Lukken:
I think that's right. And we have lots of institutional money flowing into blockchain, whether it's R3 or digital assets, that is a big theme for us down here. We'll have a lot of people talking about distributed ledger technology while we're down here, and ways to improve the processing behind clearing and back office management of exchanges. It's not only happening in the financial services community, but everywhere, whether it's real estate or other forms of the business community. There is a strong case to be made for blockchain. I think it has big upside potential.
Josh King:
You'd think that a guy that was born in 1452 and died in 1519, wouldn't have a lot to say about how to bring more creativity to the futures industry, Walt. But Leonardo da Vinci, the Italian Renaissance polymath is the subject of a new biography by Walter Isaacson, who's also a keynote speaker of yours this week. How do you think Isaacson will draw the line of technological advancement from the 15th century to the 21st?
Walt Lukken:
Well, I hope we get to hear Isaacson's views on that. I think he has really looked at innovative minds of geniuses throughout his tenure as an author, whether that's Einstein, whether that's Benjamin Franklin, whether it's Steve Jobs in modern day. So, Da Vinci, and I'm about halfway through that book, he was always somebody who was creatively thinking, on all forms, whether it was medicine, art, whatever inventions, whatever he was doing, he was bringing creative disruption, as we say in modern day times to the common thinking then. So I'll be fascinated to hear how Walter Isaacson threads all those things together for us and how we might be able to learn from those experiences.
Josh King:
Growing up as you did, a kid in Indiana, is there a certain wiring of the brain that predisposes a young man toward math and economics?
Walt Lukken:
That's a good question. What attracted me to the futures industry was sort of the combination of economics and sort of financial theory. I love the fact that sort of the basis of how our pricing really dates back to Black and Scholes pricing methods and things that won Nobel prizes. And really people couldn't price these things until these two very bright mathematicians and economists came together, Fischer Black & Myron Scholes, to put this together to allow us to do this. And that just opened up the ability for us to move money back and forth in time to think, again, in more three dimensional means for finances. That's both good and bad. It allows us to hedge risk on products that there is great volatility, but it also can lead to leveraged problems like we had during the financial crisis. So, I just love sort of the academic and the history of our industry. I think people who are intellectually challenged by those things will love it too.
Josh King:
Was the Lukken household won that prized excellence in three dimensional chess?
Walt Lukken:
No, I think my parents were pretty modest folks and it came from very middle class background, but a great upbringing, and they encouraged me to go to school and academics and it really allowed me to thrive as somebody who loved math and economics and law. I ended up going to law school.
Josh King:
I want to go a little deeper into your work for Senator Lugar later in our conversation, but one thing he had was such a plain spokeness about complex issues, both in economics and foreign policy, telling voters back home or watching on the Sunday shows what they needed to know. So, what do average investors need to know about the futures industry?
Walt Lukken:
Well, I think if you're investing in index funds or if you're one of the major Vanguard or those types of institutions, you have to know that those financial companies are investing in futures. Typically, an investor like us, we're not investing in futures directly, there are ways to do that. But the institutions that we are investing in certainly are utilizing futures to manage risk to lessen volatility. So, they're important vehicles for not only managing risk, which they often do, but also discovering prices, making sure that we're able to know what the price of oil or the price of gold might be, what the price of IBM might be, even when the trading is not active at night. These are important attributes the futures market spring to every investor.
Josh King:
I'm looking at the calendar, March 2018, 10 years, since what many regard as really the start of the global financial meltdown. Along with Treasury Secretary, Hank Paulson, Fed Chair, Ben Bernanke and the New York Fed President, Timothy Geithner, the CFTC was right in the middle of it. Without inflicting too much post traumatic stress on you, Walt, bring us back a decade ago to when the world held its breath.
Walt Lukken:
Well, we were just coming out of really an oil crisis, where oil had reached $140 a barrel. We were having, with those individuals, with Hank Paulson and Chairman Bernanke and Tim Geithner, was part of the President's Working Group, which was the name of the body it was called before it was the FSOC. We would meet frequently to talk about the issues affecting the markets. I remember, as Bear Stearns started to come to be, but learning new terms like credit default swaps and the different tranches of the securitized assets. It was quite a learning curve for me to come up to speed, not really something that was impacting directly the regulated futures markets, but something certainly that had an impact on the entire economy once that came to collapse.
Walt Lukken:
So, we were actively talking about all those things, and I'm just thankful that group of individuals were in the seats that they were in, whether it's Secretary Geithner at the time, President of the New York Fed, Secretary Paulson and Chairman Bernanke, all had unique experiences that allowed them to add something during the financial crisis, some sort of expertise that helped us to get through that. It wasn't always popular what they had said or what they were asking us to do. But I think in hindsight, history will show that they did the right things at the right times and worked together. This was certainly a bipartisan discussion that was going on during that time to make sure our economy did not collapse.
Josh King:
It started with Fannie and Freddie, Lehman Brothers went bankrupt, Bear Stearns sold to JP Morgan Chase for $10 a share, down from its 52 week high of 133. AIG, the global insurer needing a government bailout. Where were you when this all went down?
Walt Lukken:
I was up in New York during a Lehman Brothers weekend. And the CFTC's main job at that time, I know there was a lot of discussions with the large investment banks about making sure that Lehman was either bought or went into a predictable bankruptcy. They were working feverishly over the weekend to do that and thought they had a deal on Sunday. And that ultimately fell through when the UK regulators balked at the proposition of Barclays buying portions of Lehman Brothers. But the CFTC, in particular were working with its foreign counterparts, making sure there was a strong line of communications with their foreign counterparts and regulatory counterparts, but also making sure the assets, both the customer positions of Lehman Brothers, as well as the house positions, we're going to find a home somewhere. That's really one of the tenants of clearing, it is portability.
Walt Lukken:
You hear about this a lot that we need to port positions. Well, this was a real live test case where we were taking house positions of Lehman Brothers, importing them from a potentially failing FCM to a healthy one. And we were able to do it. We were able to do it and customers found homes very quickly with really little disruption. And on Monday morning, even though Lehman went bankrupt, those positions, both house and client found homes somewhere else and the futures markets were discovering prices, their volumes increased because a lot of the other markets went dark. And so the futures markets, I think, and that's really when the collective light bulb went on for a lot of us that, "Wow, clearing works, and this market's actually working when others are failing."
Josh King:
So, prices were discovered, clearing worked and clearings become an increasingly important cornerstone of the global economy. But back then, those chaotic months in 2008, in the middle of a presidential campaign, it seemed like every weekend was another fire drill. Were you relieved when it was all over, when power was transferred to the Obama administration?
Walt Lukken:
That actually was a relief when you got to sort of hand the reins over to somebody else. And that was January 20th, 2009 for me. We weren't quite under the same sort of pressure because the futures markets work so well during that period of time. But there still was always concerns that a failing bank and their FCM business as a result of that could take down positions. So, we were closely monitoring that. I gave the CFTC staff all the credit. There were leaders there and staff that were working weekends to make sure that those positions were where they were supposed to be, that customer money was segregated and protected. Staff ended up doing a fantastic job during that period of time. We ended up giving CFTC chairman's awards to those individuals that were up in New York with me and that really made sure that those markets held together during that tough time.
Josh King:
In the 10 years, since the financial crisis, Walt, how has the CFTC continued to evolve from your perch as its former acting chairman?
Walt Lukken:
Well, certainly being the first agency to get out of the gate on mandatory clearing and Chairman Gensler deserves the credit for that. He immediately jumped into Dodd-Frank and was able to put that into place relatively quickly. Today, something in the order of 80% of interest rate swaps are cleared, and that was really because he took that mandate seriously and got that into place. Same with swap execution facilities and allowing swaps to be on exchanges on lit markets. Chairman Gensler certainly deserves a lot of credit for all that he did post Dodd-Frank.
Walt Lukken:
And I think the chairman since then have taken on the reins from him and continue those efforts. Chris John Carlo, now that we're 10 years out, has been left with the task, "Okay, is everything working?" I think it's appropriate for us to review whether the rules of the road are working as they were intended to be. My guess is that most are, and I think that there are a lot of successes out there. But I think anybody, any good CEO of a company would say, "Okay, it's time to check to see whether these things are working. And if they're not, how can we fix them?"
Josh King:
You've talked about three unintended consequences that may have been left as a result of the fixes put in place after the financial crisis. Barney Frank, author of the Dodd-Frank Legislation is going to be here at FIA Boca later this week. Let's tackle all three, starting with how you think the actual cost of clearing has increased due to regulation, not just here in the US, but with Basel and Europe as well?
Walt Lukken:
Well, I think we need to make sure that Basel properly recognizes the risk mitigating benefits of clearing. I think coming out of the financial crisis, the G20 nations met and agreed, "There are two primary things we need to do, one is to get more things into clearing, because clearing worked. We saw that in Lehman Brothers." And so that's where the mandatory clearing requirement came to be. And we need more capital in banks, both our common sense, smart thing for regulators to put forward. Unfortunately, the way that some of the Basel rules have come into place is they actually count clearing and client margin for clearing as leverage. It's not leverage, it is the client's money that is put aside in the clearing system if there's an emergency, if for some reason, a client defaults, it's always there during a crisis and to count it as the bank's leverage, I think is a measurement of that leverage.
Walt Lukken:
We've encouraged the prudential regulators to try to fix that, and doing that, it would help to really appropriately proportion the risk that banks are taking on and clearing in a way and allow capital to be held on that, but not over hold capital for activities that are really risk mitigating. And so we have been tirelessly talking to prudential regulators as well as Congress about this. In fact, there's a bill introduced by Chairman Blaine Luetkemeyer of Missouri, that would fix this issue, it's bipartisan, and we're excited that Congress is taking a hard look at this and might try to fix this legislatively.
Josh King:
The second thing you talk about is the increasing difficulty with cross-border trading and clearing. How do you think new bridges can be built?
Walt Lukken:
Well, it gets down to trust. I think post-crisis, every nation pulled in their horns, and it's understandable that they would. Let's protect the home front and the domestic markets. The problem with our markets, they're very global. About a third of our business on domestic exchanges or foreign exchanges come across border. And so the liquidity we need for these markets exist are coming from overseas. We have to find some way for regulators to work together so that they don't stifle the marketplace by duplicative regulations or conflicting regulations, the foreign regulator deferring to the home country regulator, if the rules are deemed comparable. And that makes a lot of sense. So, it's for us, we're trying to get back to that system of recognition. We should make sure there's a well-balanced recognition system in there so that these markets can continue to grow and thrive and be safe and regulated too. This is not mutually exclusive concepts, markets can grow and be safe at the same time and we think mutual recognition is the way to do that.
Josh King:
Successful trading and clearing takes a ton of investment and a ton of money, especially the burdens of compliance. No one wants a repeat of 10 years ago, but how do you balance compliance with the freedom to grow?
Walt Lukken:
No, I think initiatives like the KISS Initiative that the CFTC has put forward is what's the end goal? What's the outcome we want? And are there simpler, faster, less costly ways to do those things? We should be constantly looking at our regulations to make sure that there's a purpose behind them and that if it's a valid purpose, are we doing it the most effective way that we can to accomplish that? The EU is going through it's amira review, here in the United States, the KISS Initiative. I think that's part of the job of a trade association is to say, "Here are regulations. We agree with the outcome. How can we do it more effectively?" And that's really what FIA strives to do.
Josh King:
After the break, we talk to Walt Lukken about Boca 2018 and the future of futures.
Speaker 1:
Crude oil was one of the most widely used and actively traded commodities in the world. ICE Brent futures was developed as a water born contract in 1988 to protect against price movements of crude oil produced in the growing Norwegian and UK North Sea. The contract quickly grew to become the global price benchmark for crude oil. Today, the Brent complex includes a family of more than 400 related Brent based hedging instruments, including the benchmark for diesel fuel, ICE Gas Oil. Visit the ice.com/global-cruise for more information.
Josh King:
Back now with Walt Lukken, the President and CEO of the Futures Industry Association. Let's return to what we mentioned earlier, the beginning of your career working with one of the giants of the US Senate, Richard Lugar of Indiana, the chairman of the Senate Foreign Relations Committee. I remember him when I worked for President Clinton, accompanying the president on foreign trips to offer advice and counsel to a commander in chief of the opposition party. Will that kind of bipartisanship ever return to Washington D.C.?
Walt Lukken:
I think it's muscle memory. I really think, us trying to get back into patterns of bipartisanship and rewarding people for that bipartisanship. Unfortunately, the system is not set up to reward people for being bipartisan. In fact, Chairman Lugar has worked with Georgetown University after he left the Senate to come up with a bipartisanship index, where it rewards people for coming together, working across the aisle on initiatives. Whether that was him and Sam Nunn working together on getting rid of nuclear weapons with the old Russian states or on agricultural farm policy. There's lots of good examples of us coming together across the aisle to try to work on common policies on financial services.
Walt Lukken:
I'm excited the Senate is working on a bipartisan bill that tries to take the ideas from both sides of the aisle and how we can improve things for community banks and smaller regional banks. I think these are all positive things that hopefully, again, creates some muscle memory for us to try to do it again and again and again. And only then I think we'll get back into the days of trying to work together. It used to be that compromise was not a four letter word, today it is, with wings of both parties. So, we have to figure out some way to bring that middle together, but hopefully, there's ways to do that.
Josh King:
Did Lugar give you particular lessons or wisdom in terms of figuring out how to work with opposing sides?
Walt Lukken:
I think he would listen. He would listen to good ideas wherever they came from. I wish he wasn't compromising for the sake of compromising. He went to where the ideas were good and good ideas are not one party or another, they can come from anywhere. I think that really drove him is, where are the good policies? And you shouldn't think of things in black and white and right and left and Republican and Democrat. Just what are the good policies. That doesn't mean he wasn't principled and had his own views on how he should decide things, and he certainly did. But he was willing to sort of forget those lines and blur those lines at the appropriate time when it meant furthering the country.
Walt Lukken:
And hopefully, I think a lot of it came back to those that served in the military and the war, World War II and beyond. He was briefing generals post World War II, and those people, whether it was senator Inouye or Bob Dole, they had a common bond together of working for the benefit of the United States I think the war experience really held that together. Unfortunately, people now and the Congress don't have that experience that really united them as Americans versus Republicans or Democrats.
Josh King:
A man representing the futures industry can draw lessons from Lugar, Inouye and Dole, but you need to stay squarely focused on what you actually do, managing risks in the future. You have your eye on three trends, I think, that you think will shape the industry's future. The first one we can all agree is technology as both an enabler and a disruptor, the role of big data, cloud computing and AI, and what they'll play in revolutionizing our business.
Walt Lukken:
It sort of gets back to Moore's Law, that these things are changing in exponential time for us. So, you mentioned blockchain earlier, but cloud computing is enormous benefit. And all is about data, where are we housing data? How is it protected? How are we best utilizing that reference data? We think about that constantly, not only for our members, can we improve processes? Can we reduce costs? But even how we service our members. So we have FIA Tech, which is an independent entity within the FIA family that allows us to be a utility for the industry, for its give up arrangements and also for making sure that people are paid for those give up arrangements. Even to the extent of us building a technological solution for the industry, we're always trying to figure out ways to make it more cost effective and efficient for the industry.
Josh King:
Another trend is the rise of China. On March 26th, the Shanghai International Futures Exchange will open for business. Is it time to shift our perspective from Made in China to Trade in China?
Walt Lukken:
I think it's step one. Everybody's been looking to China for many years. The promise of it opening up, it's going to happen, it's going to happen, it's going to happen. This year feels a little bit different to me. I was fortunate enough to be in Shanghai in November, late November with the chairman of the CSRC and he has an international advisory council that I sit on. But President Xi has indicated that he wants the financial markets to develop in a way that can service the second largest economy in the world, China. The only way for China's economy to grow is to have a world class financial system to match the economy.
Josh King:
Going from a saving station to an investing nation.
Walt Lukken:
That's right. And so they're looking at all sorts of mechanisms on the security side, on the asset management side, but on the futures markets too. So, what we're looking at in the futures markets, how do we get foreign investments into the futures markets? I think there are two initiatives. One's going to be the INE crude oil contract that comes out soon. I think that's at the end of March. We have iron ore coming in right after that as well. But they're also talking about starting to cross list products. So, there may be a product that a foreign exchange lists somewhere else, maybe the United States, maybe London, that they may want to cross list in China. The CSRC is open to all those ideas. That's investing into China, but there's also, how do we get Chinese exposure to foreign markets?
Walt Lukken:
They already approved a couple banks that are change members of both US and European exchanges, but CSRC indicated in November, they're going to prove more so there'll be more banks. And that's good news because as we mentioned, there are fewer and fewer FCMs in the world, and one way to make that up is to have China start putting some of that capital into banks that are coming onto our markets. So, those are positive trends that I really think that China's going to open up and flower this year, more than years in the past.
Josh King:
And finally, Walt Lukken, the transformation of energy markets. I'm filling up my gas tank over the weekend and paying $2.50 a gallon. It's pretty stable. As we were talking earlier, before the financial crisis, peak oil was 145 bucks a barrel. You think we'd ever go back to those days?
Walt Lukken:
Well, I think it's amazing if you look 10 years ago where we were, even it was $140 barrel, but people were talking about $200 a barrel oil at that point. So, we didn't know where the markets we're going to head. There were lots of pressures among politicians that we should be clamping down our markets, closing our markets, putting position limits to lower the price of crude oil. I think what we did is try to make sure that the market were discovering prices, that they were properly risk managed, that there was not fraud or manipulation going on. But if the prices were bad prices, that's the market. The futures markets are a mirror of what the commodity supply and demand is. We're just the thermometer, we don't set the temperature, it just measures the temperature.
Walt Lukken:
I think you fast forward now, and the amount of investment as a result of having $140 a barrel oil is the amount of investment that went into fracking into deep well drills, into directional drilling was enormous. Last year, $1.7 trillion of investment went into energy production. And so now we find ourselves in a case where oil is sort of almost capped at a range, because they know that ... I read today that if oil gets above $70 a barrel, the fracking technology will come out and will crash the price of oil again.
Walt Lukken:
And so, technology and investment and capital is what caused that to happen. The cure for high prices is high prices. What I'm here to say is that we should allow our markets to discover prices freely. And of course we should prevent manipulation. Of course, we should prevent fraud. Regardless of that, unless that is occurring, even though the prices may be unpopular with the populace, there are important signals that get sent to the capital markets so that we can divert capital where it's most needed. This is a great case for that. And it's probably changed the geopolitics of the globe for decades to come.
Josh King:
Open markets discovering prices freely, the Futures Industry at work, Walt Lukken, its President and CEO, a big week ahead here in warm and sunny Boca. Thanks for spending a few minutes here in the Ice House.
Walt Lukken:
It's my pleasure. Thank you.
Josh King:
That's our conversation for this week. Our guest was Walt Lukken, President and CEO of the Futures Industry Association, recorded here at the Ice House's Winter Warmup, the Boca Raton Resort and Spa in Boca Raton, Florida. If you like what you heard, please, rate us on iTunes so other folks know where to find us. If you've got a question or a comment you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us @NYSE. Our show is produced by Pete Ash and Ian Wolf with production assistance from Ken Abel. I'm Josh King, your host, signing off from Boca Raton. Thanks for listening, see you next week back in New York.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor it's affiliates make any representations or warranties, express or implied as to the accuracy or completeness of this information and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security or recommendation of any security or trading practice.
