SEC Re-proposes Rule Exempting Certain Broker-Dealers from Registration Under the Investment Advisers Act of 1940

Special from Jay Gould and David Goldstein, White & Case LLP

The Futures Industry Association (the “FIA”) has released results of their annual survey of trading volume on derivatives exchanges around the world. The figures for global growth in exchange-traded futures and options show strong growth through the first 10 months of 2004, except in Korea where the world�s largest derivatives exchange experienced a significant decline in the world�s largest derivatives contract, the Kospi 200 option. Excluding the effects from changes in the Kospi 200 equity index option, the number of derivatives contracts traded on exchanges around the world increased by 18.9% in the first 10 months of 2004. In total, the global number of derivatives contracts traded on exchanges hit 7.4 billion in the first ten months of 2004, an increase of 9.2% from 6.78 billion in the same period in 2003. A significant source for this increase in trading volume can be attributed to an interest rate futures contract traded on the BM&F in Brazil (up 82%) and a similar contract traded on the MexDer in Mexico (up 39%).

In the U.S., volume in the Chicago Mercantile Exchange’s Eurodollar future increased 40.5% and for the Chicago Board of Trade’s future on the 10-year Treasury note, volume increased 30%. The volume of trading in the option on that future increased 34%, and the future for the 5-year T-note, volume increased 40.3%, measured from the same 10 months in 2003. In contrast to the sharp growth in the U.S. and developing countries, the lead contract on the world�s largest futures exchange, Eurex�s Euro-Bund futures, fell by 8.8%. The most significant reversal in trading volume was the Kospi 200 equity index option, which traded 221.4 million fewer contracts in 2004. Only seven exchanges had total trading volume in excess of 200 million contracts in 2003.

The FIA has released additional figures to cover all of 2004, including the ranking of the 60 largest derivatives exchanges around the world. The growing presence of derivatives trading in developing countries remains significant. Three of the largest 10 exchanges are in developing countries (Korea, Brazil and Mexico), while nine of the largest 25 exchanges are in developing countries (China (2), India, South Africa, Taiwan and a second Brazilian exchange). Other developing countries with exchanges in the top 60 include Argentina, Singapore, Hungary (2), and Malaysia.

Another important figure shows the total trading volume for all of 2004, and the breakdown of growth in trading volume by type: equity, interest rate, foreign exchange and commodity. The total number of derivatives contracts traded in 2004 was 8.8 billion, up 9% from 8.1 billion in 2003. The fastest growing type was foreign exchange contracts (35.4%) followed by individual equities (28.4%) and interest rate contracts (20.7%). Energy derivatives were up 11.9% but this may include some OTC energy derivatives cleared by NYMEX. Figures for equity indices were overwhelmed by changes in the Kospi 200 option.

In sum, the FIA survey shows continued growth in derivatives trading and provides further indications that an increasing source of the growth will be in developing countries. At the same time it indicates that interest in trading on exchanges in the US is rising rapidly, surpassing the growth at both Eurex and EuroNext-LIFFE in 2004. It also illustrates that changes in trading volume often are accompanied by changes in volatility as the large movements in the US dollar show up as spikes in FX futures and options trading.