Futures by Liffey threaten future for Liffe

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The Independent Online
AMERICAN futures exchanges are poised to exploit the growing European appetite for currency options under plans being developed by the Irish government and the Philadelphia Stock Exchange.

The Irish Development Authority is in advanced talks with US exchanges on establishing a new trading floor in Dublin's Financial Services Centre, an offshore zone for tax purposes, to trade currency options.

The growth in trade in currency options has been the driving force behind the explosive expansion of the foreign exchange markets in recent years.

Trading could be under way by the second quarter of next year, according to Mr Brendan Logue, head of the IDA's Financial Services Programme.

The Philadelphia Stock Exchange, which has the world's largest market in currency options and is one of the few US exchanges to reap the benefits of the recent European currency crisis, has suggested calling the new system the 'Irish American Exchange'.

But trading will be conducted initially by branches of the US exchanges. This means that they are likely to be regulated by the US Securities and Exchange Commission and the Commodity Futures Trading Commission. The Irish Central Bank is expected to give its approval to these regulatory arrangements.

If the Dublin exchange proves a success, the use of offshore 'branches' regulated by home authorities may ultimately prove a landmark in breaking down the barriers to global trade in certain kinds of derivatives posed by differing national regulatory regimes.

Almost as intriguing is the prospect of trading American Depositary Receipt futures from Dublin, which would offer traders in European stock option futures new opportunities to arbitrage between centres such as London and Amsterdam.

ADRs are share certificates or bearer securities for shares in non- US companies which have been deposited in a bank located outside the US.

Several UK or European shares are usually bundled together to make one receipt.

ADRs are preferred by American investors to single non-US shares because, like American stocks, they offer a higher nominal value. Trading ADR futures could offer investors the prospect of larger gains (or losses) than trading options in single non-US shares.

Officials of the Philadelphia Stock Exchange said they were already in talks with the Irish authorities on establishing a market in ADR futures based in Dublin. Mr Logue, of the IDA, said no start- up date had been agreed on. But he added: 'We're in very positive talks; they are at a very serious stage.'

The new Dublin-based offshore exchange will begin with trading in dollar index futures by Finex, the financial division of the New York Cotton Exchange.

The IDA is also in discussions with the Philadelphia Board of Trade, the Chicago Board of Trade and the Chicago Mercantile Exchange on plans to trade currency options.

In addition, plans are afoot to attract exchanges from the Far East to boost the prospects for the Dublin- based trading floor.

Both these developments would give American exchanges the chance to extend their trading days and may eventually pose a threat to the London International Financial Futures Exchange's dominance of the British market in financial futures.