CME Group CEO Craig Donohue was in Boca Raton, Fla., this week for the 36th Annual International Futures Industry Conference. SmartBrief Finance Editor Sean McMahon sat down with Mr. Donahue to talk about Dodd-Frank, merger mania and other news in the industry.
What aspects of Dodd-Frank concern you the most?
I think it is best to answer that by reference to over-arching concerns because Dodd-Frank is so large and there are so many different rulemakings. I think the two big concerns are making sure the CFTC really sticks to what the statute requires versus going well beyond what the statute requires. I think there is a number of instances where at least in the advance notices and proposed rulemaking, in effect they seem to be almost attempting to legislate versus just stick to what Congress intended. That would be my first concern.
Second, in everything that they are doing they really need to focus on the cost-benefit analysis, which is congressionally mandated as well. They need to consider: How do we comply with the stature, but be cognizant of the impact that our proposed rules are actually gonna have on the industry and market participants. And the larger question of does it incent people to use our well-regulated markets or does it drive them to other alternatives that they have.
Is there anything that Dodd-Frank missed?
There absolutely is. Very central to the crisis was the mortgage market and mortgage finance. With the government-sponsored entities we clearly had too much liquidity in the system, lax lending practices, people speculating on real estate or using essentially free money to bet on non-recourse loans. If prices in Miami or Las Vegas or California continue to go up, then the person that is using free money through the mortgage markets won, but if it declined and it was worth less that what you paid for it then the taxpayer lost and the investor didn’t. I think it is hard to argue that we would have had the crisis that we did, but for what was happening in the real estate market, mortgage lending and securitized assets, which weren’t derivatives, by the way. Nobody has really dealt with that problem yet. The reality is that 98% of outstanding mortgages are owned by the GSEs. I think that is a remarkable problem for us, and of course Dodd-Frank doesn’t deal with any of that. Dodd-Frank really got into a lot of areas that were extraneous to the central theme of the crisis.
What kind of grade would you give the SEC and the CFTC for their response to the flash crash?
I’d give it a D. Primarily for the reason that the SEC doesn’t have any of the data to actually show what was happening in the order books of the many, many dozens of execution centers and cash equity securities and can’t really explain using the audit trail what happened that allowed stocks that were trading at $42 to gap down to a penny. So that would be my primary reason. Secondly, I think it is really erroneous to criticize a bonafied institutional asset manager for executing a hedging strategy in the market and using parameters around their order that were very sensible in terms of limiting the amount of traded volume that they were a part of. The had a hedging program. Most of their hedging was done as the market was rallying, not as it was declining. I think the report didn’t really portray that in a very accurate light.
What is your read of the recent merger mania?
It’s difficult to comment too much on that. I think in the end, most mergers and acquisitions have to be judged in the final analysis by what they accomplish after their done. Unfortunately, most mergers and acquisitions fail to create value for shareholders. I think it would be premature to judge then in these cases. The people who are doing them hopefully believe that they can actually create efficiency that benefits not only customers, but shareholders. It’s not possible to know at this point, but let’s see how they do a year or two or three from now.
Any comment on possible participation by CME in all the merger mania?
We’ve been very consistent in two respects. One is that we’ve kept our focus on exchange-traded derivatives and cleared swaps as areas of business that we think we excel at. Despite a decade of opportunity to do so, we’ve rally not gotten into the cash equity or equity options markets. We like our strategy. We like our position in the market. We think we’ve got great growth opportunity. We had double-digit growth again last year. so far this year we are up substantially more than we were last year. Our strategy is really really focused on taking advantage of growth opportunities in developing and emerging markets: Brazil, Korea, China and other places. And really moving more heavily into the index services area and expanding the range of clearing services that we provide. Not just in terms of OTC and listed, but also geographically we’ve launched our clearing house in London, so we are going to stay focused on our strategy.
What is your read on the recent record volumes with the VIX?
First of all I think its a great product. I think its been a huge success so I am not surprised. I think they’ve done a great job. We are working with them to use their VIX methodology to create indices and use VIX for trading other non-equity asset classes.