Derivative markets 'face devastation'

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The Independent Online
European derivative markets will be devastated after a single currency is introduced, leaving the sector to be dominated by London, Paris or Frankfurt, Irish officials predicted at the weekend after their own Ifox market closed down.

The Irish Futures and Options Exchange, a seven-year-old screen-based market in Irish punt and bond derivatives, suspended trading two weeks ago and was formally closed after a vote by its members on Wednesday.

Officials in the market and the Dublin government predicted that the move would be echoed across the European Union as smaller currencies are swallowed up by the planned new euro.

"The introduction of the euro in two and a half years' time is going to put a question mark over other domestic markets," said Fergus Sheridan, the managing director of consultancy Strategic Risk Management, who was brought in as chief executive of Ifox during its last year. "They'll be dropping like flies," added another official.

Up to a dozen exchanges could be in trouble, although some may be bailed out by governments exerting pressure on domestic institutions and others will find new niche markets to exploit. "One has already become a clearing house," said Mr Sheridan.

A spokesman for Liffe, the London exchange expected to survive, if not thrive in the shakeout, said it had no plans to poach business from smaller rivals but was confident trade would arrive unsolicited.

While smaller domestic exchanges have carved out markets for themselves, international business naturally drifts towards the centre with the greatest liquidity. Liffe has already started trading in contracts for the euro, assuming it is introduced in 1999, even though Britain probably will not join the currency, at least initially.

Ifox was the first new exchange to be created in Ireland since the Dublin Stock Exchange was set up in 1799. It was established in 1989 at the instigation of the former Irish Taoiseach Charles Haughey in response to interest from international institutions. Until then, Ireland's bond market was "a sleepy hollow", according to one government official. "When the cash market stated to take off, it was thought the success could be replicated in futures."

However, Ifox soon ran into liquidity problems. Most of its members were fund managers, who saw themselves as price takers rather than price setters. So, too, did the 30 per cent of the market made up of international investment houses. Only four primary dealers were setting prices, and they found they could deal just as efficiently directly with each other, or by hedging in Denmark, whose currency has had a 95 per cent correlation with the punt over the last 10 years.

Despite the demise of Ifox, Dublin's financial sector, founded on favourable offshore tax rates of 10 per cent, is expected to flourish.