Leo Melamed lost two good friends in the last few days in Bob Wilmouth and Les Rosenthal. I stopped by Melamed’s office to share my condolences and have him share some thoughts on these two futures industry leaders.
He told me the futures industry as a whole lost two people who were critical to the success of the industry in the U.S. and who worked with him to help create what the late Merton Miller called the “modern era of finance.” He told me how these two CBOT leaders became his good friends.
It was the threat of a transaction tax leveled by Congress in order to police the futures industry that originally brought the Chicago Mercantile Exchange’s Melamed and the Chicago Board of Trade’s Rosenthal together in 1980. Former Senator Robert Dole was keen to create a transaction tax in order to help the recently created Commodity Futures Trading Commission fight non-exchange member fraud.
Exchange members were regulated by the exchange, and the exchange was regulated by the CFTC, but no one was regulating the introducing brokers or commodity trading advisors. So Melamed convinced Dole to allow the industry to create something completely new as allowed by the Commodity Exchange Act in Title III: a registered futures association that was a self-regulatory organization.
Those discussions spawned the National Futures Association, a regulator overseen by the CFTC, but one that would craft a regulatory structure to oversee these other parts of the boisterous futures industry.
In order to convince Dole, Melamed had to construct an organizing committee that had credibility, so he turned to the CBOT’s chairman, Leslie Rosenthal. Other members were John Conheeney from Merrill Lynch, David T. Johnston from E.F. Hutton; George D.F. Lamborn from Shearson; Warren W. Lebeck, (formerly CBOT President), and Howard A. Stotler.
Rosenthal suggested Wilmouth for the role of head of the NFA, something that would give the new regulator the integrity of a former banker and credibility as the head of the largest futures exchange in the world. Bill Mallers, Sr., then a behind the scenes political force at the CBOT, was also for moving Wilmouth to the new NFA.
Wilmouth was so eager to take the job and leave the member-controlled CBOT that he travelled to Scottsdale, Ariz., to meet with Melamed while he was on vacation to discuss the role. Over three days they hashed things out in the Arizona desert.
As a result of the plans for the NFA, Dole withdrew his plans for the transaction tax. Instead, the NFA instituted a transaction fee that has trended down in price as the industry grew and volumes exploded.
Melamed, who served as the NFA’s first chairman, gives Wilmouth a tremendous amount of credit for forming the NFA into an effective regulator. Melamed would later step down as chairman of the NFA in favor of Conheeney, but would return as special permanent advisor to the NFA board. Melamed gained this role after Wilmouth stepped down in 2008 as special advisor after his 2003 NFA retirement.
The feeling between Melamed and Wilmouth was mutual. The Chicago Tribune quoted Wilmouth at the time of Melamed’s retirement as chairman of the NFA saying Melamed was “the single most important“ person in the futures business. “He`ll be very difficult to replace.”
Wilmouth helped show that the private sector could do the job of regulating its market better and less expensively than the government. And he did it in a way that did not create animosity between the NFA and CFTC, Melamed said.
Melamed and Rosenthal shared the common bond among traders and the “my word is my bond” integrity that was key to the open outcry markets.
Rosenthal opened the door for Melamed to come and address the members of the CBOT board of directors about why the NFA was needed.
One CBOT board member, Ralph Peters, asked Melamed if we did not have enough cops already, why create one? Melamed’s response about a private regulator and the shared values of free markets versus a government regulator, aided by Rosenthal’s lobbying, won the day and the CBOT joined the NFA creation effort.
Working together to create the NFA showed the two hyper-competitive exchanges that they had things in common. Melamed wanted to bring the exchanges together and his first step was to name Rosenthal to the CME board after his term as CBOT chairman was over. Rosenthal would also go on to become chairman of the Chicago Board of Trade Clearing Corporation.
Rosenthal and Melamed would often team up with Tom Donovan in taking on important issues in Washington, D.C. Melamed would sometimes testify before Congress, and he encouraged Wilmouth to do the same. The combination of the exchanges and the industry regulators being on the same page before Congress was a powerful message.
As the NFA developed, it gave the futures industry a cloud cover of respectability and changed the image of the industry.
Rosenthal and Melamed were close friends and would talk about issues facing the exchanges and industry. Melamed said Rosenthal had an unusually adept political sense and could tell who was winning and who was losing.
Melamed also said there were times of friction between him and Rosenthal, like the time the CBOT won the right to list Nasdaq futures. The CME responded with the newly created S&P Over The Counter index, or SPOC. Neither product thrived.
Melamed said Rosenthal helped him by buying an International Monetary Market membership when the exchange was created. Melamed later returned the favor and bought a CBOT membership.
Rosenthal supported Melamed’s efforts to promote electronic trading, despite its unpopularity on the CBOT trading floor. Electronic trading would go on to save the CME and the futures industry, Melamed said.
I can’t imagine the sadness Leo Melamed feels this week. He, like many longtime exchange members, has seen too many of his friends leave this world. But these two key figures were part of a unique time in the history of our industry and leave the industry and our world a better place for their contributions. That is something we can all smile about.