International Money Market

The International Monetary Market (IMM) was introduced in December 1971 and formally implemented in May 1972, although its roots can be traced to the end of Bretton Woods through the 1971 Smithsonian Agreement and Nixon’s suspension of US dollar’s convertibility to gold.

The IMM Exchange was formed as a separate division of the Chicago Mercantile Exchange, and as of 2009, was the second largest futures exchange in the world. The primary purpose of the IMM is to trade currency futures, a relatively new product previously studied by academics as a way to open a freely traded exchange market to facilitate trade among nations.

The first futures experimental contracts included trades against the U.S. dollar such as the British pound, Swiss franc, German deutschmark, Canadian dollar, Japanese yen, and in September 1974, the French franc. This list would later expand to include the Australian dollar, the euro, and emerging market currencies such as the Russian ruble, Brazilian real, Turkish lira, Hungarian forint, Polish zloty, Mexican peso, and South African rand. In 1992, the German deutschmark/Japanese yen pair was introduced as the first futures cross rate currency. But these early successes didn’t come without a price.

The challenging aspects were how to connect values of IMM foreign exchange contracts to the interbank market—the dominant means of currency trading in the 1970s—and how to allow the IMM to be the free-floating exchange envisioned by academics. Clearing member firms were incorporated to act as arbitrageurs between banks and the IMM to facilitate orderly markets between bid and ask spreads. The Continental Bank of Chicago was later hired as a delivery agent for contracts. These successes bred an unforeseen level of competition for new futures products.

The Cboe Options Exchange competed and received the right to trade U.S. 30-year bond futures while the IMM secured the right to trade eurodollar contracts, a 90-day interest rate contract settled in cash rather than physical delivery. Eurodollars came to be known as the “eurocurrency market,” which is used mainly by the Organization of the Petroleum Exporting Countries (OPEC), which always required payment for oil in U.S. dollars. This cash settlement aspect would later pave the way for index futures such as world stock market indexes and the IMM Index. Cash settlement would also allow the IMM to later become known as a “cash market” because of its trade in short-term, interest-rate-sensitive instruments.

With new competition, a transaction system was desperately needed. The CME and Reuters Holdings created the Post Market Trade (PMT) to allow a global electronic automated transaction system to act as a single clearing entity and link the world’s financial centers like Tokyo and London. Today, PMT is known as Globex, which facilitates not only clearing but electronic trading for traders around the world. In 1975, U.S. T-bills were born and began trading on the IMM in January 1976. T-bill futures began trading in April 1986 with approval from the Commodities Futures Trading Commission (CFTC). The role for banks in this new international arena exploded in order to meet the demands of financing capital requirements, new loan structures, and new interest rate structures such as overnight lending rates; increasingly, IMM was used for all finance needs.

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