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Good Derivatives: A Story of Financial and Environmental Innovation


Praise for Good Derivatives

"Richard Sandor is a true genius. That is obvious. For creating the world's most popular class of futures contracts? For persevering with climate projects despite headwinds of incredible force and dysfunction? Or for marrying Ellen? All of the above but more so, in my view, for marshaling teams superbly. I enjoyed the pride of membership on one of them. If he ever seeks your help, say 'yes' and do it fast!"
--PHILIP McBRIDE JOHNSON, Past Chairman, Commodities Futures Trading Commission

"No one has more insight into the power of markets to achieve environmental objectives than Richard Sandor. In Good Derivatives, he combines his depth of experience in the marketplace with his passion for telling stories. At the heart of this work is his belief that innovation--financial innovation in particular--has helped make the American economy supreme. He not only sheds light on the evolution of financial innovation through the different products and methods that became available, but also through the role he played using markets to shape policy goals that he cares about. Sandor examines how the marketplace and trading can create value for society, and ultimately drive environmental ends in a positive direction. This is a strategy that defines his lifetime of work."
--U.S. SENATOR JEFF BINGAMAN (D-NM), Chairman of the U.S. Senate Committee on Energy and Natural Resources

"This book represents the work of one of the world's most brilliant, inquisitive, and visionary minds. Richard Sandor knows this subject as an economist, a trader, an executive, an entrepreneur, but most of all, as a teacher. No one else in the world could have written this book. There is lots of intrigue in financial markets, especially in Chicago. He lifts that veil, while also explaining what derivatives are all about."
--AMBASSADOR CLAYTON YEUTTER, Past Secretary of the U.S. Department of Agriculture and U.S. Trade Ambassador

Richard L. Sandor is Chairman and Chief Executive Officer of Environmental Financial Products LLC, which specializes in inventing, designing, and developing new financial markets with a special emphasis on investment advisory services. EFP was established in 1998 and was the predecessor company and incubator to the Chicago Climate Exchange (CCX), the European Climate Exchange (ECX), and the Chicago Climate Futures Exchange (CCFE). Dr. Sandor was honored by the City of Chicago for his contribution to the creation of financial futures and his universal recognition as the "father of financial futures." In October 2007, he was honored as one of Time magazine's "Heroes of the Environment" for his work as the "Father of Carbon Trading." Dr. Sandor is a Distinguished Professor of Environmental Finance at Guanghua School of Management at Peking University and a Lecturer in Law at The University of Chicago Law School.

Foreword ix

Preface xiii

Acknowledgments xxi

Chapter 1 The Early Years 1

Chapter 2 Trying to Change the World 23

Chapter 3 The Berkeley Years 47

Chapter 4 The Chicago Board of Trade Years: The Commodity Futures Contract 65

Chapter 5 The Chicago Board of Trade Years: Financial Futures Contract 89

Chapter 6 Educating Users and Building the Market 125

Chapter 7 Treasury Bond and Note Futures 139

Chapter 8 The Decade of the Eighties 167

Chapter 9 Globalizing Chicago Exchanges 191

Chapter 10 Environmental Finance 205

Chapter 11 Blame It on Rio 223

Chapter 12 The Beginning of the Entrepreneurial Years 239

Chapter 13 You’re Gonna Trade What? 265

Chapter 14 From the Pit to the Box 291

Chapter 15 Conceiving a New Kind of Exchange 313

Chapter 16 The Twenty-First Century Lighthouse 327

Chapter 17 CCX Market Architecture 351

Chapter 18 Chicago Climate Exchange 375

Chapter 19 The Rise of the Chicago Climate Exchange 393

Chapter 20 The Fall of the Chicago Climate Exchange 413

Chapter 21 The Chicago Climate Futures Exchange 429

Chapter 22 The European Climate Exchange 453

Chapter 23 India 479

Chapter 24 Opening New Markets in China 501

Chapter 25 Good Derivatives 533

Appendixes 559

Acronyms 575

Glossary 577

Index 593