Liffe confident after another record year

Another year, another record for the London International Financial Futures and Options Exchange (Liffe).

By last August the exchange had traded more derivatives contracts than in all of 1993. Trading volume in 1994 as a whole, at 153 million contracts, was 50 per cent higher than in the previous year. The exchange has sustained a 50 per cent average annual growth rate for more than a decade.

Liffe's growth easily outstripped that of its Continental rivals, Matif in Paris and the Deutsche Terminborse (DTB), last year. They managed volume increases of 29 per cent and18 per cent respectively.

It also boasts of having overtaken the world's two giant futures and options exchanges in Chicago - the Board of Trade and the Mercantile Exchange - on 12 days in 1994.

The bond market crisis early in the year gave an impetus to trading on Liffe's bustling open outcry floor. The first half of the year was busier than the second, while the number of contracts traded actually fell 32 per cent between November and December.

However, Italy's political turmoil came to the rescue, making waves in the country's financial markets. Liffe's two-star contracts, thanks to this volatility, were Eurolira futures, with volumes 134 per cent up on 1993, and futures in Italian government bonds up 86 per cent.

Growth in trading volume in Bund futures was close behind, increasing 83 per cent. Liffe reckons it increased its share of the Bund futures market from 70 to 75 per cent, at the expense of the DTB.

Nick Durlacher, Liffe's chairman, expressed caution about how much longer the exchange can continue to grow at such spectacular rates. He reckons its maturity is likely to mean slower expansion in the end.

Daniel Hodson, the chief executive, acknowledges that the underlying rate of growth has slowed. The scandals that have kept derivatives in the headlines have concerned over-the-counter products - swaps, futures and options contracts tailor-made by investment banks for clients - rather than contracts traded on exchanges, but both types lie under a bit of a cloud.

Prominent casualties of losses on over-the-counter deals in 1994 included Procter & Gamble, Metallgesellschaft and the local authority of Orange County, California. Although these problems have highlighted the relative safety of supervised exchanges suchas Liffe, Mr Hodson said any reduction in the use of derivatives that resulted would affect over-the-counter sales and trading on exchanges.

However, he is optimistic that Liffe can continue to expand at a healthy clip. "I feel very bullish about London," he said.

One reason is that the dramatic losses some companies and investors suffered on derivatives last year could mean stiffer regulation of the US exchanges. This, he says, would be likely to drive business offshore.

More important, Liffe prides itself on its liquidity and efficiency, especially in times of turbulence in the financial markets.

It plans to expand its international partnerships to extend trading hours in its contracts and improve their distribution. Partners include the Chicago Board of Trade and the Tokyo and Singapore futures exchanges. Liffe is exploring an electronic link with the Board of Trade for 24-hour trading.

It will expand its trading floor from 26,000 square feet to 31,000 square feet this year. A move to new premises, with a floor at least three times bigger, is no longer imminent but is still on the cards in five years' time. If business does grow another50 per cent a year between now and then, the expansion will seem long overdue.

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