Latin American Capital Markets

PROMOTING REGIONAL CAPITAL MARKET INTEGRATION 1931984. 44 This arrangement allows a trader taking a position on one exchange to reversethe position on the other exchange. A trade executed on SIMEX by a CME clearingmember, for example, can be transferred to the CME's account at the SIMEX clearingorganization, which in turn results in the establishment of an identical position on theCME for the CME clearing member. CME traders can thus effectively use SIMEX as anextension of the CME trading floor after the CME has closed. An analogous arrangementallows SIMEX traders to use the CME while SIMEX is closed.The primary reason why the CME established the link was as a weapon tohelp it compete internationally against the London International Financial Futures Exchange(LIFFE), which was then battling against the CME to establish itself as the dominantforum for trading eurodollar contracts. Given LIFFE's perceived advantage inbeing closer to the Asian time zone than the CME, a link with SIMEX was viewed asproviding a valuable foothold for the CME in the Far East The CME also identified severalbenefits of the link for its members and their clients. The advantages noted forFutures Commission Merchants were that it gave them the ability to offer clientssomething closer to 24-hour trading at low cost and that it reduced the costs andrisks they incurred in trading on a foreign market. CME member firms also gained theability to increase business by acting as an executing agent for those SIMEX memberfirms that wished to have their trades cleared through the CME.The benefits of thelink anticipated for members' clients were as follows: they gained the ability to managethe risk of potential price movements overnight; the link expanded the numberof trading hours available for active traders; it reduced transaction costs by requiringonly a single margin structure; it assured clients the ability to offset a position takenon SIMEX on what they knew to be a liquid market, namely the CME; and it gaveclients reassurance because their positions, whether initiated in Singapore or on theCME, could be held in Chicago on the books of the CME.The link was initially agreed for a 10-year period in 1984. Although the contractualdetails of the scheme were not released, there was apparently no financial aspectto the original CME/SIMEX agreement The CME thus saw the main goals of thelinkage to be to increase order flow to its members and to forestall LIFFE's attemptsto trade eurodollar contracts. The mutual offset system succeeded in doing this, asLIFFE's share of trading volume dwindled, following the opening of the link, until LIFFEfinally delisted its Eurodollar contract in 1996. When the CME/SIMEX mutual offsetagreement was renegotiated in 1994, a financial element to the contract was established.In particular if one exchange was a net transferor of contracts to the other ex-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub44 The discussion of the CME-SIMEX linkage is taken from Lee (1999, pp. 76-77).