FOW Meets... Gerry Corcoran
When John and Bob O’Brien regained control, in December, of the brokerage that has been in their family for nearly a century, their chairman, CEO and long time friend was a happy man. 
“I joke that we’ve got the band back together,” laughs Gerry Corcoran, head of the US’s largest independent futures brokerage, RJ O’Brien and Associates. With assets of some $2bn spread across more than 80,000 clients, however, Corcoran hasn’t had much time to reminisce.
The O’Briens were one of the founding families (the last surviving, in fact) of the Chicago Mercantile Exchange; the present firm was founded in 1914 by John McCarthy, whose daughter married RJ O’Brien Snr.
Having been friends with the brothers since the 1970s, Corcoran (pictured) has been at RJO since ’87. He had been financial controller at the Chicago Sun-Times and joined RJO as chief financial officer just before the stockmarket crash of that year. But then, Corcoran and the O’Briens have lived through a good few crises between them.
Corcoran recalls the ban on onion futures in the 1950s, when, “as John O’Brien will tell you, at one time the burlap sacks were more valuable than the onions they contained”.
Market manipulation by two CME traders had pushed the price of a 50lb bag from $2.75 down to 10¢ in little over six months. Artificial demand for the onions was such that the vast quantities of onions being shipped into Chicago led to shortages in the rest of the country.
The rogue traders’ game was shut down in 1956, however, when Congressman Gerald Ford’s Onion Futures Act banned their sale altogether – a ruling which persists to this day (in spite of then CME president EB Harris likening it to “burning down the barn to find a suspected rat”.)
Sign of the times
A more recent upheaval came in 2007, when the O’Briens sold a majority stake in the family business to two private equity firms, Spectrum Equity Investors and Technology Crossover Ventures.
“This investment allows us to pursue our growth strategy and continue to invest in innovative technologies,” insisted John O’Brien at the time. “What won’t change is our culture, our management team and our industry-leading commitment to customer service.”
Continuity was certainly part of the deal. Corcoran, already chief executive, became chairman too.
From a business point of view, the O’Briens’ timing couldn’t have been better. When the private equity bubble burst, sending asset values plummeting and millions into negative equity with it, the O’Brien family saw an opportunity.
At the end of last year, John and Bob submitted a formal offer to buy back a chunk of the firm – enough to regain family control. Corcoran couldn’t be happier. “They think about the business long term,” he enthuses, his excitement and close bond with the brothers evident.
What has changed in futures markets in the 24 years Corcoran has worked for the family? He’s had a great vantage point from which to view and shape those changes, having been heavily involved with the Futures Industry Association for much of that time. He was made a director of the trade body in March 2008.
Corcoran also serves on the board of the National Futures Association, as well as its Audit Committee, making sure the voice of FCMs is heard amid the regulatory din from the banks and exchanges.
“Put simply, the total global expansion of the futures industry has been the biggest change,” Corcoran says. “It was totally Chicago-centric before.” With new exchanges, multilateral trading facilities and broker crossing networks opening (and closing) on a weekly basis the world over – many of them in Asia – it’s hard to disagree.
“Technology is what drives all of this,” Corcoran adds. “It’s all about the electronics.” It’s been quite a learning curve for the old futures commission merchants, used to the certainties of the trading pit, Corcoran admits – even for a firm as big as RJO.
But the company has remained well ahead of the pace, Corcoran says, largely thanks to the forward-looking management style of the O’Briens. “We invested early in tech. We’ve lowered cost and expanded our offerings,” rolling with the tide.
Exit the treasurer, enter the risk manager
At a more elemental level, Corcoran argues the use of derivatives by corporate hedgers has been the biggest business change and driver of volume over the past two decades. Having been one himself, how has Corcoran seen the job of the CFO evolve in that time? In a word, he says, “hedging”.
Knowledge of risk management has become the prime focus, rather than making sure everyone keeps hold of their receipts. “They have to work so closely with their chief risk officer now,” Corcoran says.
Knowledge and use of derivatives is now seen as the norm for CFOs. Whereas back in the 1980s it would have been thought gauche to use options to hedge against oil price rises, now it is regarded as foolhardy not to.
“Do people accept exchange-traded derivatives now? That would be an explicit yes.” Corcoran says. “The commodity markets are acceptable. Now, you’re criticised if you don’t hedge your commodity exposure.”
Some contracts – options in particular – will still be a ‘break glass in case of emergency’ style position, Corcoran argues, adding that he knows at least one major US airline which has hedged its 2011 oil price exposure at $120 a barrel. “It’s like fire insurance. You never expect to use it, but you sign that $2,000 cheque every year.”
Regulatory concerns
Risk managers aren’t the only new board appointees CFOs will be seeing a lot more of. Last month, RJO hired MF Global’s highly regarded compliance counsel, Nancy Westwick, as its first chief compliance officer.
The former chair of the Chicago Bar Association’s Futures and Derivatives Committee joined RJO on the same day as the Options Clearing Corporation, the world’s largest clearing house, announced an equivalent appointment.
“You have to have this now,” Corcoran explains. “The regulations are getting broader and deeper with the advent of Dodd-Frank. The regulators, too, are very aggressive – and for good reason.” You can build up a fortune over 50 years, Corcoran says, but see it dashed overnight by calamitous counterparty risk. “Hiring attorneys is expensive, but everyone has to do it.”
How has Corcoran felt the impact of Dodd-Frank legislation on a day-to-day basis, even before the first rulemakings take effect in July? “It’s an evolution. The biggest challenge is just trying to stay on top of what’s being discussed... If you wanted to be briefed every day, you’d have to give up your day job,” he laughs bitterly. “The regulators write these rules in a vacuum, sometimes. They don’t understand the immediate consequences. It’s a learning curve for them too,” he points out. “But Gensler understands this; he comes from the real world.”
Full of praise for the former Goldman executive, Corcoran says he has been impressed at the new era of open dialogue the CFTC chairman has opened up with the FIA – as well as the trade body’s energetic response. “I’ve never seen the FIA work so hard to understand these things and do so much for its members. They’re not just out for us though – they respect that some things have to change.”
All eyes to the future
From most angles, it’s hard to see how the shifting regulatory landscape in the US can do anything but benefit the exchange-traded markets.
Contracts, often highly bespoke, that have lurked in niche industries for decades or centuries (such as shipping, with a new freight exchange, Cleartrade Exchange, set to open in Singapore in February) are being standardised and driven on to regulated venues. Have the FCMs really got much to worry about – other than how quickly they can hire more brokers?
It’s commodities which are driving RJO’s family renaissance, Corcoran says. “We’re commodity-centric. The softs markets are extremely robust.”
In 2010, a huge record year for global futures and options trading, 2.86bn commodity contracts were traded. The US and Canada shifted 806m between them – second only to Asia’s combined 1.68bn on the back of rampant demand for China’s agricultural contracts. Appetite for exchange-traded commodity derivatives has not only held up during the financial crisis, it has rocketed.
North America was the only continent where exchange-based commodity trading fell during the recession, from 698m contracts in 2008 to 679m in 2009.
So do last year’s figures, erasing that loss and pushing the US inexorably towards the 1bn contract turnover mark (a figure it looks likely to hit if January’s oil and gold records hold up), come as a surprise to Corcoran?
“Not in the slightest. There’s just such a demand and vogue for commodities right now. I think [2011] will be as good or even better,” he enthuses. “I don’t see any end to high commodity values, huge volumes and huge demand. Just look at India and China. And energy speaks for itself.”
RJO is covering its bases in the metals markets too. In January, it hired veteran metals trader and hedge fund manager David Maynard from Ebullio Capital Management. The former London Metal Exchange Ring man will report to Janet Mirasola, the firm’s head of metals, from RJO’s growing New York office.
But the manufacturing and building industries aren’t the only ones driving the macroeconomic train, Corcoran insists. The touch of central banks the world over will begin to be felt again in 2011, after two years trapped between a rock and a hard place – a move which will have an immediate effect on all financial hedgers.
“The long term interest rate market will wake up in the second half of the year,” he surmises. “People will have to start raising rates.” For the big financial futures exchanges, Corcoran thinks the benefit in volumes will be felt right along the curve – from the CME’s benchmark three month Eurodollar Futures, right out to seven years.
Titans united?
Will the sound of cash pouring into its coffers start the Merc looking around for potential takeover targets once again? “I think the big boys are essentially done with their mergers on the futures side,” says O’Brien, reflecting on a decade of deals in which Intercontinental Exchange and CME Group have bought up nearly a dozen exchanges between them. “The next phase will be consolidation among the options industry, before we see any cross-mergers on the futures side.”
Whatever the market throws at it, however, Corcoran insists RJO will be ready. “I’ve been here for 24 years. Every year I’ve seen new exchanges start up. They’ll come up with new business plans... the next big markets for us are metals and FX. We’ll need offices in Beijing, Hong Kong, even Europe.”
Looks like Gerry And The O’Briens will be dancing to their own tune for a while.