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Good Derivatives: A Story of Financial and Environmental Innovation

ISBN: 978-1-118-21639-2
640 pages
April 2012
Good Derivatives: A Story of Financial and Environmental Innovation (1118216393) cover image
Through the eyes of an inventor of new markets, Good Derivatives: A Story of Financial and Environmental Innovation tells the story of how financial innovation – a concept that is misunderstood and under attack - has been a positive force in the last four decades. If properly designed and regulated, these “good derivatives” can open vast possibilities to address a variety of global problems. Filled with provocative ideas, fascinating stories, and valuable lessons, it will provide both an insightful interpretation of the last forty years in capital and environmental markets and a vision of world finance for the next forty years.

As a young economist at the Chicago Board of Trade, Richard Sandor helped create interest rate futures, a development that revolutionized worldwide finance. Later, he pioneered the use of emissions trading to reduce acid rain, one of the most successful environmental programs ever. He will provide unique insights into the process of creating these new financial products. Covering successes and failures, the story describes the tireless process of inventing, educating and creating support for these new inventions in places like Chicago, New York, London, Paris and how it is unfolding today in Mumbai, Shanghai and Beijing.

The book will tell the story of the creation of the Chicago Climate Exchange and its affiliated exchanges (European Climate Exchange, Chicago Climate Futures Exchange and Tianjin Climate Exchange, located in China). The lessons learned in these markets can play a critical role in effectively addressing global climate change and other pressing environmental issues. The author argues that market-based trading systems are a far more effective means of reducing pollutants than “command-and-control”. Environmental markets may ultimately help to find solutions to issues such as rainforest destruction, water problems and biodiversity threats.

Written in an engaging, narrative style, Good Derivatives will be of interest to both practitioners and general readers who want to better understand the creative process of financial innovation. In the middle of so much distrust of markets, it is also a recipe of how transparent, well-regulated markets can be a force for good in the environmental, health, and social areas.

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Foreword ix

Preface xiii

Acknowledgments xxi

Chapter 1 The Early Years 1

Chapter 2 Trying to Change the World 23

Chapter 3 The Berkeley Years 47

Chapter 4 The Chicago Board of Trade Years: The Commodity Futures Contract 65

Chapter 5 The Chicago Board of Trade Years: Financial Futures Contract 89

Chapter 6 Educating Users and Building the Market 125

Chapter 7 Treasury Bond and Note Futures 139

Chapter 8 The Decade of the Eighties 167

Chapter 9 Globalizing Chicago Exchanges 191

Chapter 10 Environmental Finance 205

Chapter 11 Blame It on Rio 223

Chapter 12 The Beginning of the Entrepreneurial Years 239

Chapter 13 You’re Gonna Trade What? 265

Chapter 14 From the Pit to the Box 291

Chapter 15 Conceiving a New Kind of Exchange 313

Chapter 16 The Twenty-First Century Lighthouse 327

Chapter 17 CCX Market Architecture 351

Chapter 18 Chicago Climate Exchange 375

Chapter 19 The Rise of the Chicago Climate Exchange 393

Chapter 20 The Fall of the Chicago Climate Exchange 413

Chapter 21 The Chicago Climate Futures Exchange 429

Chapter 22 The European Climate Exchange 453

Chapter 23 India 479

Chapter 24 Opening New Markets in China 501

Chapter 25 Good Derivatives 533

Appendixes 559

Acronyms 575

Glossary 577

Index 593

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Richard L. Sandor is Chairman and Chief Executive Officer of Environmental Financial Products LLC, which specializes in inventing, designing, and developing new financial markets with a special emphasis on investment advisory services. EFP was established in 1998 and was the predecessor company and incubator to the Chicago Climate Exchange (CCX), the European Climate Exchange (ECX), and the Chicago Climate Futures Exchange (CCFE). Dr. Sandor was honored by the City of Chicago for his contribution to the creation of financial futures and his universal recognition as the "father of financial futures." In October 2007, he was honored as one of Time magazine's "Heroes of the Environment" for his work as the "Father of Carbon Trading." Dr. Sandor is a Distinguished Professor of Environmental Finance at Guanghua School of Management at Peking University and a Lecturer in Law at The University of Chicago Law School.

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