A derivatives first

William Brodsky, chief executive officer of the Chicago Board Options Exchange, today became the first executive from a derivatives market to take over as chairman of the World Federation of Exchanges.

Mr. Brodsky's inauguration, which was hosted by NYSE Euronext in Paris, is the latest sign that securities and derivatives can no longer be treated as isolated markets at a time when Washington lawmakers are pondering putting all trading under one regulatory umbrella.

The 15-member WFE board elected Mr. Brodsky — who heads the world's largest options exchange — in October, succeeding Massimo Capuano, CEO of Borsa Italiana, Milan.

“No doubt, the WFE used to be a pure stock-exchange federation,” Mr. Brodsky told reporters at press briefing in January New York. But last year, futures exchanges CME Group Inc., Chicago, and IntercontinentalExchange Inc., Atlanta, joined the WFE as full members.

“Although we used to have stock or derivatives exchanges, but the fact is that, today, they are combined,” Mr. Brodsky said to explain the evolution of the non-profit trade group, which represents 56 member exchanges and 54 affiliate and correspondent markets.

International exchange groups such as New York-headquartered NYSE Euronext, the parent of the Liffe derivatives exchange in London, or Deutsche Boerse AG, which co-founded the Eurex AG futures market in Frankfurt, have diversified their listings to leverage their resources and better serve investors. Smaller exchanges around the world have also merged securities and futures operations.

“It became obvious to exchanges that you could not separate derivatives from cash markets,” said Mr. Brodsky, whose own exchange group also includes the CBOE Stock Exchange and the CBOE Futures Exchange, which just experienced a banner year as the home of derivatives contracts on the VIX, the CBOE Volatility index.

“Most exchanges in the options business are more than options exchanges,” Mr. Brodsky noted, referring to his U.S. competitors, such as Nasdaq OMX Group Inc., New York, which also owns more than one exchange model.

The now well-established trend among investors to trade across asset classes and across borders requires harmonized regulations — particularly in times of financial crisis.

“We encourage global regulators to recognize the time-tested benefits of transparency, balanced regulation and central counterparty clearing available in exchange markets,” Mr. Capuano, the outgoing WFE chairman, had said in a statement concluding the WFE board’s Oct. 12 meeting in Milan.

The WFE’s appointment of Mr. Brodsky also underscores the view that the U.S. needs regulatory reforms in an area where it lags its peers, which have sought to modernize their market structure sooner. For instance, in the United Kingdom, the Financial Services Authority has long been regulating all U.K. markets under a single framework.

In the U.S., while the Securities and Exchange Commission supervises stocks and options - already an unusual dichotomy as options are treated as derivatives in most countries - the Commodity Futures Trading Commission is responsible for futures oversight.

More significantly, the two U.S. market regulators operate within two very different legal frameworks: a rules-based one for the SEC, a principles-based one for the CFTC.

Merging the two regulators can only work if Congress agrees on one unifying regulatory system — a possibility that Treasury Secretary Henry Paulson raised a year ago, when he sought comments about several possible scenarios for sweeping reform of the U.S. financial system.

Mr. Brodsky expressed confidence that, under the administration of President Barack Obama, reforms will progress quickly.

The CBOE’s planned launch of a new trading platform, C2, to support the fast-growing segment of algorithmic trading of options is being hampered by the multiple regulations. In order to launch the platform, the CBOE, which already owns three exchanges, must seek a fourth exchange license from the SEC, a cumbersome process likely to drag into the fall. If the futures-trading CME had a similar plan, it could just launch the platform and inform the CFTC via a simple notification.

“The question is what is the position of the (Obama) administration on how do we define regulations?” Mr. Brodsky said, acknowledging that the bifurcated regulatory system was unique to the U.S. He had already fought the complexities of that impractical system during the lengthy debate over single-stock futures.

Mr. Brodsky has broad experience in the exchange business as executive vice president at the American Stock Exchange in 1979-'82, CEO of the Chicago Mercantile Exchange, now CME Group, from 1985 to 1997, and CBOE chairman and CEO since 1997.

WFE was founded in 1961 as the Federation Internationale des Bourses de Valeurs or International Federation of Stock Exchanges to foster ethical standards and discuss issues affecting the sector.

The organization entered into a partnership with the International Options Markets Association in 2002 and began accepting futures markets and clearinghouses. Mr. Brodsky served as chairman of IOMA in 2006-‘08, while also serving a WFE vice chairman.