How Futures Markets Fuel Economic Growth

Economy and Markets_Terry Duffy

 

We’re entering the final days of election season when candidates make their last pitches for how to make things better. Over the course of the campaign, that pitch has focused mostly on two things: economic growth and job creation. Until next Tuesday, we can expect some level of rhetoric from candidates for all kinds of offices around unemployment reports, GDP data and activity in the markets.

But as important as this fall’s elections are, there’s something that has a bigger impact on economic growth and job creation than who sits in the White House or the halls of Congress. And that is a business’ ability to manage risk and act with confidence.

Recently, I gave a speech at Georgetown’s McDonough School of Business on the topic of market quality. For me, this was an opportunity to address the role of markets in giving business’ the ability to make decisions confidently by controlling costs and investing for the future.

Many of us understand this concept. But when we think about job creation and economic growth in an election year where the U.S. is still climbing out of a recession, political philosophies and candidates are often the first things that come to mind.

In the media storm around the campaign, we shouldn’t forget the role of effective risk management in providing economic benefits. This is what businesses of all kinds turn to our markets for – from farmers to airlines.

I was on a panel today at the Futures Industry Association’s annual expo on the outlook from Washington. When the Presidential race came up, every panelist discussed how opposing political stances would impact the health of our markets and the new rules and events – like mandatory clearing and the fiscal cliff – which could have an impact on the businesses that trade on our markets.

Futures markets help businesses limit losses and increase value. Supply and demand ultimately determine if there’s a rise or fall in the price of gasoline or food or any other commodity. But it’s our markets that help limit the costs that might be passed onto the consumer at the grocery store or at the airport. In essence, we help farmers plant more crops, and help airlines fly more flights by allowing them to lock in a price for the commodities they’re buying or selling.

When this happens on a large scale, economic growth is enhanced either directly or indirectly. And not just through commodities markets.

According to the International Swaps Dealers Association, 92 percent of the world’s 500 largest companies have reported making some use of derivatives – including futures and options like those offered at CME Group.

Of these users, more than 90 percent took advantage of derivatives to manage interest rate risk, 85 percent to manage currency risk, and 25 percent to manage commodity price risk.

More than 3 billion futures and options contracts are traded annually on our markets, with an underlying value of more than $1 quadrillion.  This staggering volume from just one exchange underscores the vital economic role played by our industry.

Macro-economic events like this year’s drought, rising or falling demand from a major commodity consumer like China, or actions from the Fed all contribute to the risks of doing business in America. Certainly our government and political process plays an important role in the direction of our economy. But without markets like ours, businesses’ confidence – including their ability to hire workers — would be left to the whim of unpredictable events.

About the Author

Terry Duffy is the Executive Chairman and President of CME Group.

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