Good Derivatives: A Story of Financial and Environmental Innovation

Chapter 17

CCX Market Architecture

Daring ideas are the chessmen moved forward; they may be beaten, but they may start a winning game.

—Johann Wolfgang von Goethe

Every year seemed to pose a hurdle for CCX. We had just survived 9/11 and the mild recession of 2001. Just when I thought we were through the worst of it, a disturbing event occurred.

Enron, a gas pipeline company with a large presence in energy and emissions trading, was running into severe financial problems and had been targeted for investigation by the SEC and the Justice Department. Their problems could easily sully the reputation and people's perceptions of cap-and-trade. It was an all-too-familiar case of a financial or industrial firm attempting to become the largest or only counterparty to all buyers and sellers. Others had tried it and failed.

Incidents like this incorrectly gave exchanges a bad name. Exchanges abided by a dramatically different business model compared to single companies that were market makers. A central marketplace broadened the market rather than narrowed it. The exchange was the platform for transactions and did not attempt to influence prices. The clearinghouse was simply a financial guarantor of all transactions. Throughout 2002, I found myself having to repeatedly explain how exchanges differed from single or dominant companies that acted as principals.

In spite of the looming problems with Enron, 2002 began with a bang. Our design committee for CCX had grown to 54 members, and in January, ...