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Financial Risk Management

Chicago, known around the world as a center for arts, sports and commerce, is also recognized as the global leader in the field of financial risk management. The Civic Committee of the Commercial Club of Chicago has described Chicago’s futures and options exchanges as the “dominant factor… in identifying Chicago’s position as a world financial center.” Relatively few Chicagoans actually ever buy or sell any of the derivatives products offered by the City’s financial exchanges, which are used primarily by large global financial institutions to hedge their price risk in interest rates, equities, foreign exchange, commodities, or other financial or non-financial assets. However, the risk management industry has a large impact on the economic health and well-being of Chicago, Illinois and the nation.

Futures and options markets are a global growth industry, with a compounded annual growth rate of 38 percent during the last three years, compared with relatively flat growth for the world’s stock markets. By comparison, over-the-counter (OTC) derivatives markets have grown at a rate of 28 percent during the last three years.

Additionally, there are a number of long-term secular trends that will continue to drive growth and innovation in derivatives, including:

• A greater need for risk management and hedging tools in an increasingly uncertain global political and economic climate,

• Growing investor sophistication concerning derivatives and risk transfer markets, and

• A significant shift in asset management strategy away from passive equity market investments to trading-based returns involving alternative investment vehicles and alternative asset classes.

Chicago has become the center of gravity in global derivatives markets because of increased investor sophistication with regard to hedging and risk management activities using derivatives. Futures and options have now gone mainstream and are considered essential tools for today’s portfolio managers, traders, investment bankers, chief financial officers and corporate treasurers.

As Chicago’s derivatives exchanges continue to move towards increased electronic trading, a large amount of financial and human capital in Chicago will be deployed in new areas. Our community of well-capitalized and entrepreneurial traders is creating hedge funds, proprietary trading firms and other trading-related businesses. In doing so, they are extending their spirit of entrepreneurialism in ways that will continue to benefit Chicago.

Craig S. Donohue Chief Executive Officer
Chicago Mercantile Exchange

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