View from City Road: Liffe looks set for a long one

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The Independent Online
LIFFE'S volumes have almost doubled so far this year, helped by an unusually busy September when daily turnover topped pounds 100bn. It is probably too much to expect growth to continue at the same rate but Liffe looks set to expand further.

Fund managers are taking to derivatives in ever-growing numbers. According to a survey by Phillips & Drew Fund Management, less than a fifth of fund management firms use futures and options but more than a quarter say they may use them in the future. A further 22 per cent have not yet considered using options or futures.

Compare this with stock lending. Only 11 per cent of fund managers lend shares or gilts to other investors - usually market makers needing stock to cover them over a short period - while a further 15 per cent may lend stock in the future.

But a massive 56 per cent consider stock lending inappropriate, which suggests that the practice will take years to become established, if ever. The comparable figure for index futures is just 29 per cent.

It may be that the Maxwell fiasco has put fund managers off stock lending. Liffe must be hoping that its burgeoning business is not affected by a similar disaster.

The growing use of futures and options should soon have an impact on the performance of pension funds. WM and CAPS, two performance-measurement firms, already assess a fund's performance on two bases - with and without derivatives.

It will be interesting to see what difference the use of futures and options makes to performance in the medium term. If it does not bring higher returns or reduced risk, trustees might ask what all the fuss is about. Until then Liffe's future looks assured.

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