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Futures Exchanges Go Green


Open market could ease burdens, lay groundwork for avoiding future debacles.

In sea of red a few of the commodity and futures exchanges are seeing green on hopes that an announcement, which could come as soon as after the close today, will push to have certain derivatives listed and traded on exchanges.

Shares of the Intercontinental (ICE), whose predominant a products are energy and soft commodity such as juice and sugar, and the CME Group, which is the combination of the Chicago Merc and Chicago Board of Trade, and has a lock on an array of bond, interest rate and currency and products among more traditional commodities such as corn, soybeans and cattle, are both trading higher today, as they're seen as the most likely beneficiaries.

Price and Clarity

This would be a most welcome move and one the exchanges have been petitioning for even before the exotic products such as CDOs, went haywire. In fact, back in February of 2008 the CME had filed with the CFTC to list swaps and other derivatives but nothing came to fruition.

Of course they have some self interest in adding these products to their mix but it also makes sense to finally to trade on platform that would provide liquidity, better price discovery and more transparency.

Now that many of these positions need to unwound and there is great debate over what their value is the current administration is realizing that an open market could not only ease the burden of having to sop up all that paper, but will also lay the groundwork for avoiding future debacles.

As the exchanges like to point out, they have almost never had a failure in which a counterparty was left to hang. That counterparty risk was the nub of the trouble with and forced the Treasury and Fed to try to decide who shall live -- AIG (AIG), Bear Stearns (now JPMorgan (JPM)), even Merrill (now Bank of America (BAC)) -- and who should die (Lehman). And it turned out that losing Lehman was admittedly a bad mistake and a big catalyst for the ensuing 7 months of hand-wringing and dollars down the toilet.

Had these products been exchange listed, rather that passed under a table in a back room, it would have gone a long way towards preventing, or at least illuminating, the troubles that came from overleveraged positions.

Of course, then Goldman (GS) might not have been able to get 100 cents on the dollar, as the curtain on their proprietary trading would have been drawn open.
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