REMARKS BY LEO MELAMED

On the Celebration of the Chinese Language Publication of
Escape to the Futures

May 28, 2004
Shanghai

Allow me to begin by stating how honored I am to be at this celebration and the fact that the Shanghai Securities Newspaper Publishing House undertook to publish a translation of my memoirs, Escape to the Futures. Notably, this is the second language that my memoirs have been so honored, the first translation being into Japanese.

The Chinese language translation could not have been possible without the special efforts of my friends Yang Ke, Chen Hen, Jiang Yang, CEO of Shanghai Futures Exchange as well as the Chairwoman, Madam Wang Li-Hua of the SHFE. I am deeply indebted to Yang Ke for his talent and translation skills in making this publication possible.

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I was a child of barely seven years old when World War II broke out and ensnared me in its iron grasp. I was destined to be a victim of the Nazi juggernaut as did the 6 million other Jews in Europe, including 1.5 million children, who perished at their hands. Fortunately, fate had another mission for me. Clearly, my escape was due to providential intervention. But perhaps the biggest part, was due to the brilliance of my father and mother, who miraculously found a way to save themselves and their only child from the ovens of Auschwitz and Treblinka.

My escape to freedom in 1939 spanned two years, three continents and six languages as my parents with me at their side outwitted the German Gestapo and the Russian KGB. To attempt now to describe that journey in detail would take days—to say the least—far more time than this celebration will allow. Suffice it to say that the journey, which took the three of us from Poland, through Lithuania, through all of Russia, across the Siberian steppes, to Japan, and eventually to the United States of America is a story that could make a good Hollywood adventure movie. However, at the time it was anything but thrilling. Every step we took was fraught with danger, every step could have been our last. I believe my father had to make perhaps a thousand decisions, each one being the difference between life and death—and he made every one of them correctly.

So I found myself in Chicago as a young boy with my whole life in front of me. I chose the profession of law but very soon found myself fascinated by the world of futures markets. Ultimately, I decided that my future was in futures. Not knowing whether I would succeed or not, I took the risk. In a way that decision epitomized the essence of my being—a willingness to take risk. But I must say that my rise to the top of the complex futures world is a tribute to the beauty of America. Here I was, a refugee, without money, without clout, without connections, without family, and yet America gave me the opportunity to use my imagination and talent to lead the Chicago Mercantile Exchange, and, in doing so, some would say, I not only brought the CME from a pork bellies exchange to a world-class financial institution, but revolutionized the markets worldwide.

Escape to the Futures is the story of how some of this came about. Let me dwell only on one or two salient aspect of that story. It is important to understand at the outset that in 1967, when I was first elected to the board of directors of the Chicago Merc, the exchange was a rather secondary, even meaningless institution that dealt in butter and eggs. It had a terrible reputation, it had antiquated rules—some would say it had no rules—it allowed underhanded schemes and chicanery to exist in the conduct of its affairs. It might be of special interest to all ladies in the audience that my first action on the board was to propose and enact a rule that removed a old prohibition that discriminated against women becoming members of the CME or even work on its floor. I am very proud of this achievement because the CME was one of the first exchanges in the U.S. to adopt this policy. I say "work on its floor" because in those days, all futures markets in the U.S. were by open-outcry—where its members would gather in a ring, which we called a pit, and shout out their orders in auction style to buy and sell. Today, of course, although we still have some markets that are conducted through open-outcry, 50 percent of the business is conducted through GLOBEX, our electronic transaction system that was conceived in 1987. And of course we are a global institution with 99 percent of its transactions in financial instruments.

But I am getting ahead of the story. When I was elected CME chairman in 1969, my first order of business was to reorganize the structure of the exchange. I created a legal department, an economics department, as well as a rule enforcement department. Rule enforcement, as I said, was a brand-new undertaking at the Merc and to make it work we needed a modern rule book. This was a process that took the next year and a half and resulted in the framework of a book of rules for trading in futures that is still the foundation of our present exchange and the model for the rest of the world.

Once we had rules, and the ability to ensure their enforcement, I looked at our product line. Our origin, as you know, was in butter and eggs, but both of those markets had long lost their attraction. The production of butter and eggs had changed dramatically over the years, and with that change so did the need for futures markets in those products. We were now a "meat" exchange—pork bellies, cattle, and hogs. And although we had great hopes for these product, I realized that a successful exchange cannot rely on one product line. To be successful, I believed, an exchange had to diversify. So I began a search for new and different products. I tried everything, potatoes, shrimp, apples, chickens, and even turkeys. None of them worked.

I must now digress again and tell you a little more about my travels as we were escaping from the horrors of the Holocaust. Every time we crossed a border, my father, who was a teacher, would sit me down and explain how the money changed with the different government. First we had zlotes in Poland, then we had lit in Lithuania, then rubles in Russia, yen in Japan and finally dollars in America. My father was careful to explain that the value of each of these currencies was different and that their value kept changing. It was my first lesson in economics, and it made a great impression on me as a child.

Later in life, when I was already chairman of the CME, I was reading book after book on economics. I was especially attracted to the writings and teachings of a well-known economist at the University of Chicago, the now world-famous Nobel laureate, Milton Friedman. His ideas about free markets resonated in my mind, and I became an avid advocate of this philosophy. The late 1960s and early 1970s, you may recall, was a time of great change in world markets. The economies of those countries that had been destroyed during the war—England, Germany, and Japan—had been totally rebuilt and were now entering into a new competitive world structure. The system of fixed exchange rates—the so called Bretton Woods Agreement instituted in 1945 after the war—where all currencies were valued on the basis of the value of the American dollar was by then outdated. The first infant sounds of globalization were beginning to be heard. New technologies were allowing information to flow around the world at a speed that was previously impossible. Where it used to take days if not weeks to learn of a new action by, say, the government of Japan that affected the value of the yen relative to the dollar, now that information was available in minutes. Today, of course, that information is instantaneous around the world. So the change in value of a currency could no longer wait until the ministers of finance met once a year to officially proclaim a changed value in a given currency. Value change was impacted by the speed of information.

During those days, Milton Friedman was advocating the idea that currency should float. In other words, he was saying that Bretton Woods was an antiquated idea that could no longer serve the modern marketplace. I believed him, and all of a sudden the currency lessons I experienced firsthand as a child came to my mind. I started to think, here I was chairman of a futures exchange in Chicago looking to diversify the products of the Chicago Mercantile Exchange. What if Milton Friedman is right and the currencies of the world floated and changed their values every day instead of maintaining a fixed value? Wouldn’t that require a futures market in currencies?

It was an epiphany. I became obsessed with the idea. Wouldn’t that be a great market? A market in currency where commercial users as well as speculators could send their orders to buy and sell. A marketplace that would give the world a place to hedge their foreign currency exposure. A place to manage the risk of finance.

I could think about nothing else day or night. But at the same time I realized that the idea was revolutionary. Futures markets were exclusively used in agriculture: rice, soybeans, wheat, eggs, butter, cattle. For the thousands of years of futures markets, why, I wondered, had no one ever tried to use them for financial instruments? Maybe, I thought, futures markets would not work in finance. Perhaps, I said to myself—because I am not an economist by profession—I don’t fully understand some underlying principles involved. Surely someone else would have tried it if it were possible to trade a financial instrument in a futures market. Am I therefore about to make a foolish mistake. Am I about to lead the Chicago Mercantile Exchange into a path of ridicule? One that might bring ruin to the institution? The idea would not let me rest and the worry would not let me sleep.

Finally, I decided there was only one way I could answer the dilemma. I had to ask Milton Friedman what he thought about my idea. Could a futures market support financial products? Could a market in foreign currency work? Was such a market a good thing for the world?

I met with the great man in November of 1971 and posed to him the question. He did not hesitate with the answer. "What a wonderful idea," he said. "The new world will need a futures market in currency."

I was ecstatic. Here was the great man of the University of Chicago, the Deng Xiao Peng, but of global economics, saying to me that the concept of a currency futures market was a wonderful idea. That financial instruments can be applied to futures markets. That such a market was needed. However, fearing that no one would believe me, I asked him if he would put his answer in writing. He smiled and responded that he was a capitalist. I said, "how much?" He said for $7,500 he would write a feasibility paper on the subject. I accepted the offer.

Of course, for the idea to work, currency values would have to float. Little did we know how quickly that would happen. A month later U.S. President Nixon closed the gold window and the Bretton Woods system of fixed exchange rates was forever gone. The world of finance was never again the same. At the CME I moved quickly. Sensing that I needed a specialized market for instruments of finance, I organized a financial division called the International Monetary Market—the IMM. It was designed to trade only financial instruments. It opened its doors on May 16, 1972. The first instrument was currency futures.

Of course, opening the doors on financial futures is one thing. Getting the world to accept the idea was quite another. I quickly learned how skeptical the world was about the idea. How much the world distrusted futures—especially in Chicago—especially at the Chicago Mercantile Exchange. As Mr. Donohue, the CME CEO said this morning, "We faced skepticism and indeed, criticism." The idea was labeled unnecessary, dangerous, and tantamount to gambling. It took years of work, years of education, hundreds, maybe thousands, of speeches and lectures, a nearly Herculean effort by myself and many people at the CME. Of course, the support of Nobel laureate Milton Friedman and later Merton Miller and Myron Scholes were most helpful.

Eventually, the idea took root, so much so that it was copied in every corner of the globe. From Moscow to Singapore, from Chicago to Shanghai, from London to Mumbai—to manage modern financial risks, the marketplace needed exchange-traded financial futures and over-the-counter (OTC) derivatives as these markets are called today. Their economic function to provide a mechanism to manage inherent business risks in a globalized world was universally accepted and developed not only on centralized world exchanges but in over-the-counter markets as well. As a consequence capital markets have been strengthened, national productively has improved, and standards of living have grown. In 1986, Nobel laureate, Merton Miller, bestowed upon the IMM of the CME the greatest honor: He called the invention of financial futures, the greatest innovation in business of the past twenty years.

Make no mistake about it! In our global market environment—driven by constant and changing market risks, instantaneous information flows, and sophisticated technology—futures markets and OTC derivatives are essential instruments of finance. And for emerging economies that represent the ocean of the future, they are indispensable tools in the development of free and efficient capital markets.

To learn how all of that happened, I guess you will have to read Escape to the Futures. Thank you.

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