The history of established futures markets dates back to the 1800s, but up until the early 1970s, all futures markets were referred to as commodities markets because the products traded were mainly agricultural. However, futures on financial products were quickly and enthusiastically embraced. They now dominate trading activity, accounting for about 75 percent of all derivatives trading volume in the world.
The CME Group claims credit for the creation of financial futures with the launch of seven foreign currency futures contracts in 1972. According to the CME, they were introduced in response to the breakdown of the Bretton Woods Agreement, which had governed international currency exchange-rate policy since the end of World War II.
It was during the forex market turmoil leading up to the initial revision of the U.S. dollar “gold peg” that Leo Melamed, Chairman Emeritus of CME, with the endorsement of Nobel Laureate economist Milton Friedman, championed the idea of foreign exchange futures contracts. On May 16, 1972, the CME’s International Monetary Market opened for business, listing seven foreign currency futures contracts: British pound, Canadian dollar, Deutsche mark, French franc, Japanese yen, Mexican peso and Swiss franc.
Also during the 1970s, the challenges of inflation and volatile interest rate fluctuations spawned the development of futures contracts tied to interest rates.
In 1975, the Chicago Board of Trade launched its first financial futures contract on Government National Mortgage Association mortgage-backed certificates, or GNMAs. In 1977, the CBOT introduced trading in U.S. Treasury bond futures and a suite of other Treasury futures products followed.
In 1981, the CME launched Eurodollar futures, which had an innovative feature that paved the way for even more growth in financial contracts to come. Eurodollar futures were the first futures contracts that did not require delivery of an underlying instrument, but were settled in cash. The cash-settlement innovation safeguarded their usefulness to hedgers and opened the door for new types of contracts in which a delivery option would be impossible or prohibitively expensive.
The cash-delivery feature also helped fuel the creation of index futures. First came the Kansas City Board of Trade’s launch of the Value Line Index in 1982, then the same year the CME launched the Standard & Poor’s 500 Index contract.
In the 1990s, more financial futures products came to the marketplace, and the advent of online futures trading caused a further explosion in their popularity. Mini-sized, all-electronic versions of stock index futures contracts charged onto the scene in the late 1990s and were quickly embraced.
Today, volume in the E-mini S&P 500 Index futures contract at the Chicago Mercantile Exchange often tops a million contracts per day, surpassing the larger and older benchmark S&P 500 futures contract that spawned it. Exchanges continue to launch new financial futures products to meet ever-changing investor needs.
Among the newest innovations in financial futures are single-stock futures, launched in 2002, VIX futures, launched in 2004, and event futures, which are based on specific economic releases or events.