Ownership, Governance, and Regulation of Derivatives Markets: Board Composition James M. Falvey, Gen - PowerPoint PPT Presentation

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Ownership, Governance, and Regulation of Derivatives Markets: Board Composition James M. Falvey, Gen

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Three Models. Chicago Mercantile Exchange, Inc. 'Brick and Mortar' Founded in 1898 ... a director who acts as a floor broker, floor trader, employee or officer of a ... – PowerPoint PPT presentation

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Title: Ownership, Governance, and Regulation of Derivatives Markets: Board Composition James M. Falvey, Gen


1
Ownership, Governance, and Regulation of
Derivatives Markets Board Composition James
M. Falvey, General CounselEurex US
  • FINANCIAL MARKETS RESEARCH CENTER
  • Owen Graduate School of Management
  • Vanderbilt University
  • April 22, 2004

2
Three Models
  • Chicago Mercantile Exchange, Inc.
  • Brick and Mortar
  • Founded in 1898
  • Only publicly traded financial exchange in the
    United States
  • Products equity indices, commodities, interest
    rates and foreign currency
  • IntercontinentalExchange, Inc.
  • Dot Com
  • B2B energy exchange
  • Founded in 2000
  • Consortium ownership
  • U.S. Futures Exchange, L.L.C. Eurex US
  • First trading occurred on February 8, 2004
  • Owned substantially in part by Eurex Frankfurt AG
  • Various banks trading firms are minority owners
    (Broker Tec transaction)
  • Electronic exchange
  • Currently lists U.S. Treasury (fixed income)
    products

3
The Rules Board Composition
  • Commodity Exchange Act
  • Core Principle 14 The board of trade shall
    establish and enforce appropriate fitness
    standards for directors
  • Core Principle 15 The board of trade shall
    establish and enforce rules to minimize conflicts
    of interest in the decision making process
  • Core Principle 16 In the case of a mutually
    owned contract market, the board of trade shall
    ensure that the composition of the governing
    board reflects market participants.
  • NYSE Independence Standard
  • Listed companies must have a majority of
    independent directors
  • Not independent unless the board of directors
    affirmatively determines that the director has no
    material relationship with the listed company.
  • Look Back period
  • Current and Former Employees
  • Direct Compensation
  • Business Relationship

4
Independence Standards versus Industry Expertise
  • How does one reconcile independence with the need
    for industry expertise on the Board?
  • Tension with respect to the rules under the
    Commodity Exchange Act (mutual exchanges) versus
    NYSE listing standards.
  • Running a derivatives exchange is a complicated
    matter. Without some knowledge of the industry,
    a director is of limited utility. Additionally,
    duty of care issues could be raised if director
    is not qualified.
  • Finally, the derivatives industry is a small,
    cozy group that leads to (i) difficulty in
    finding qualified candidates (small pool of
    candidates to choose from) and (ii) close
    relationships that make true independence
    difficult to achieve.

5
Chicago Mercantile Exchange
  • Divides directors into three categories (i)
    independent, (ii) independent and non-industry,
    and (iii) executive/not independent.
  • CMEs corporate charter requires diversity of
    business interests to be represented on its
    board.
  • 20 person board
  • 1 executive/non-independent director
  • 7 independent and non-industry
  • 12 independent
  • Members/Shareholders of the Exchange
  • Trading-related occupations (on the Exchange)
  • CME Independence Standards provide that a
    director who acts as a floor broker, floor
    trader, employee or officer of a futures
    commission merchant, CME clearing member firm or
    other similarly situated person that
    intermediates transactions in or otherwise uses
    CME products and services shall be presumed to be
    independent

6
IntercontinentalExchange
  • Consortium Board
  • At its inception, board consisted of members who
    represented shareholders.
  • Although not a public company, ICE decided to
    create an independent board effective November
    2002 with 2 executive directors and 5
    independent directors
  • "The newly elected board members bring a unique
    and relevant wealth of experience and leadership
    to Intercontinental. Representing a broad range
    of sectors from energy to finance, trading to
    environmental affairs, each individual brings
    valuable and insightful governance expertise,"
    Mr. Sprecher added. "The board will help ensure
    that Intercontinental sets an industry-leading
    standard for corporate governance. With the rapid
    evolution of energy markets today, guidance from
    this Board will play a critical role for
    Intercontinental as we continue to successfully
    execute our growth strategy as the standard for
    an open, neutral platform for all market
    participants."

7
Eurex US
  • Delaware LLC structure
  • Adopted Delaware corporate fiduciary duties
  • 12 member board
  • Three classes of directors
  • Class A 6 appointed by 80 shareholder, Eurex
    Frankfurt AG
  • Class B 3 appointed by 20 shareholder,
    investment banks and trading firms
  • Class C 3 nominated by Class B shareholders and
    appointed/ratified by Class A shareholders.
    Considered independent directors.

8
Thank You
  • James M. Falvey
  • General Counsel
  • Eurex US
  • 233 S. Wacker Drive, Suite 2450
  • Chicago, Illinois 60606
  • james.falvey_at_eurexUS.com
  • ph) 312-544-1067
  • fax) 312-544-1567
  • cell) 312-404-5839
  • www.eurexUS.com
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