Commodities & Futures: Odd couple takes on London

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The Independent Online
THE battle for the coveted title of Financial Centre of Europe is being fought on many fronts, but futures and options exchanges are putting up some of the most formidable contenders.

If a European capital's derivatives exchanges and the tax and legal climate for using them are successful, it can mean huge capital flows remain or move into that country. A successful exchange also feeds existing bond, money and currency markets further, which generates liquidity and unquantifiable rewards.

Last year, Liffe, the London International Financial Futures and Options Exchange, traded a record daily average turnover of 283,374 contracts, representing pounds 64.2bn a day.

With stakes that high, it's no wonder that London's position as home of Europe's most successful futures and options exchange is being challenged by Paris and Frankfurt, number two and number three in the running.

This month the Paris exchange, Matif, and the DTB, Frankfurt's financial futures and options market, agreed to join forces in what could be a Liffe-threatening deal.

They aim to link markets through computer technology so that members of both exchanges have access to some of each other's products.

Their deal involves the electronic DTB selling its advanced computer systems to Matif, which uses the traditional open-outcry method where traders scream prices across trading 'pits'.

The motivation behind the deal must be the soaring volumes at Liffe, which has carved out a niche for itself in international interest rate futures and options. In 1992, Liffe traded a record 72 million contracts, Matif traded 55 million and DTB 34 million.

Liffe has always been a tough competitor for Matif and DTB, not hesitating to start contracts the others already had or were planning. Liffe's list of active contracts includes several also listed on Matif and DTB. More often than not, the London contract has won the lion's share of business over time.

Liffe has stolen the majority of liquidity in German government bond 'Bund' futures and options contracts, which it trades in competition with DTB. On Thursday Liffe launched a medium-term German bond future (Bobl), already traded by DTB.

Both Liffe and Matif at one time traded rival ecu bond futures and Italian government bond futures contracts: Paris garnered the ecu business, and London took the Italian bond.

Matif and DTB have grown impressively themselves, but by focusing on domestic products. A few years ago, Matif was the biggest exchange in Europe and Liffe was number two. Matif's French government bond contract is Europe's most active bond future.

Backed by the powerful German banks, the dynamic DTB opened in 1988 as a fully computerised financial futures and options exchange where all trading is done electronically.

But Liffe has still outpaced them. On Black Wednesday, 16 September last year, Liffe traded even more contracts than the largest derivatives market in the world, the Chicago Board of Trade.

Perhaps the European exchanges suddenly saw that they need to move fast to prevent Liffe getting a permanent grip on business that could be theirs, and that two heads were better than one.

However, drafting a memorandum of understanding is one thing; creating a working link between two exchanges with different memberships and cultures is another.

Many exchange links have been tried in the past, and most have either fizzled out or resulted in only modest cooperation. Last year, four small European exchanges agreed to join forces, but barely a peep has been heard from them since.

That's not to say Matif and DTB will not succeed. But they have several hurdles before them. They must decide who pays who how much, since Matif will buy technology from DTB. Matif members, attached to open-outcry trading, must be convinced and trained to use DTB's electronic system.

Because of the technology transfer, the link will not be complete for 12 to 18 months, even if things proceed smoothly. So Liffe's new chief executive, Daniel Hodson, has some time to plan a counter-attack.