Why Do some Futures Contracts Succeed and Others Fail?

Federal government regulation of financial markets can work against innovation and economic prosperity by obstructing economic development in complex markets and creating additional risk and uncertainty.

This is one of the findings of a new Policy Brief from The Heartland Institute titled “Why Do Some Futures Contracts Succeed and Others Fail?” Finance expert Hilary Till explains how futures contracts produce impressive social benefits but sometimes are excessively regulated because elected officials and regulators fail to appreciate how they work.

Historically, price uncertainties caused by technological advances, wars, and government intervention have created financial risks for those who hold large inventories of durable goods. Businesses seek out financial instruments that enable them to hedge against those risks, producing economic benefits for producers as well as consumers.

Till illustrates the self-regulating nature of futures contracts by providing a brief history of why some futures contracts succeed and others fail. She writes,

[F]utures contracts and exchanges succeed only if they respond to genuine commercial hedging needs and if speculators are capable of managing the risks of taking on the hedgers’ positions. Unnecessary or inefficient futures contracts and exchanges don’t last long, the result of competition and continuous innovation by a sophisticated global futures industry.

It is incumbent on the finance industry, Till writes, to “educate the public and policymakers about the important role it plays in a global economy and the benefits it produces for the public, or else needless and counterproductive regulation will continue to be proposed and imposed.”

Additional information

Hilary Till provides advice on risk-management and derivatives trading issues through Premia Risk Consultancy, Inc. In addition, she is a co-founder and principal of Premia Capital Management, LLC. She is also the co-editor of Intelligent Commodity Investing. She has held positions in expert-system development, derivatives risk-management system development, foreign-exchange derivatives research, over-the-counter (OTC) equity derivatives research and trading, OTC interest-rate derivatives trading, commodity futures trading, commodity-index portfolio management, and fixed-income risk-management policy development.

Her published work has been cited in the Journal of Finance andJournal of Structured Finance; in studies published by international financial organizations including the Bank of Canada, Bank of Japan, Banque de France, International Monetary Fund, and the World Bank; by government bodies including the U.S. Senate’s Permanent Subcommittee on Investigations, Federal Trade Commission, Energy Information Administration, Federal Energy Regulatory Commission, United Nations Conference on Trade and Development, and the G20 Study Group on Commodities; and in studies sponsored by the Organization for Economic Co-operation and Development (OECD) and the European Parliament. She has presented her research to the U.S. Commodity Futures Trading Commission, International Energy Agency, and to the (then) U.K. Financial Services Authority.

Till has a B.A. with General Honors in statistics from the University of Chicago and an M.Sc. in statistics from the London School of Economics (LSE). She studied at the LSE under a private fellowship administered by the Fulbright Commission.