david clementi : technological innovation and e - commerce – the implications for derivatives markets speech by david clementi, deputy governor of the bank of england, at the opening reception of international derivatives week, held in london, on 19 june 2000. * * * ladies and gentlemen, i am delighted to address you at the start of what, i am sure, will be an informative and thought - provoking international derivatives week. given the recent rapid pace of technological development, it is fitting that this year ’ s conference focuses on e - commerce and its impact on the derivatives industry. this is certainly a topic of great interest to the bank of england. maintaining the stability of the financial system and the effectiveness of the uk ’ s financial services are key objectives for us and recent developments are highly relevant to both. nobody doubts that technology has rapidly changed the financial landscape, and will continue to do so. one only needs to spend time online to realise that virtually anything - from commodities, to cars, to pokemon cards - can be bought and sold by someone with access to a terminal. electronic trading and communication networks have greatly increased the “ reach ” of the traditional financial marketplaces, but at the same time allowed a wide range of new trading system providers to enter the markets at relatively low cost. it is a challenge just to stay abreast of the latest developments. i would like this evening to say something first about the role of exchanges in this new environment, and then touch on the role of technology in changing that environment and the implications for clearing houses in managing the resulting risks. role of exchanges so far, the established derivatives exchanges retain substantial and often growing volumes although, in recent years, otc derivatives trading has expanded much faster than on - exchange trading in many areas. on - exchange business continues to be dominated by chicago in the us and by london, frankfurt and paris in europe. the lme remains the world leader in its field, as do the ipe and nymex in theirs. but the number of new trading systems emerging in the various markets demonstrates that the winds of change are blowing hard, and today ’ s market leaders are aware of the need to innovate to survive in a rapidly evolving market place. exchanges are responding to these challenges in a number of different ways. some exchanges look to leverage off their involvement within wider groups containing a range of trading, clearing and settlement systems. this is not, however, our preferred structure in london ; the different tiers have different characteristics

enormous. contracts that would have taken some time to establish themselves in a pit can be quickly listed on screen at relatively little cost. trading is now possible in such diverse commodities as electricity, telecoms bandwidth and even the weather. the organisers of this event may, in future, be able to hedge their exposure to fluctuating wine prices using exchange - traded futures based on the finest premier cru, i suspect this is one contract where traders would be happy to go to physical delivery. we central bankers will have to stick to our usual vin ordinaire. in any event it will be fascinating to see what other contracts emerge over the coming months. of course, not all contracts that are launched will be successful, and it ’ s interesting to reflect on what makes a successful derivative contract. lessons can often be learned from looking back to the past. not far from this location is the home of the london metal exchange. its origins can be traced back to 1571, when traders in metal and a range of other commodities began meeting at the royal exchange. what was originally a domestic market in physical metal became a major global market, and by the early 19th century traders had been forced to use nearby coffee shops. as the uk started importing large quantities of metal from abroad during the industrial revolution, the need emerged for importers to protect themselves against price movements during the long voyage from places like chile and malaysia. the “ futures ” market which developed from those humble beginnings continued to grow and, in 1877, the london metal exchange company was formed. that market was successful for a number of reasons. volatility in the price of the underlying product made the contract attractive to hedgers and speculators alike. technology - the telegraph would you believe! - encouraged the market ’ s growth by making shipment arrival dates more predictable. the lme had a first mover advantage that still stands. liquidity flourished as traders followed one another in using the new market. so there are a number of lessons for today ’ s exchanges, to do with the need to respond to market needs, the need to make full use of available technology, and so on. role of clearing houses it will be very little surprise to many of you that, as the central bank, the aspect of these developments which interests us most is the management of risk. clearing houses have traditionally played a central role in the derivatives markets and continue to do so as those markets expand. they are also increasingly active in the underlying cash markets.