Eurex rises to the top

Derivatives exchanges

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Last year Eurex, the Frankfurt-based derivatives exchange formerly known as DTB, emerged as the world's top derivatives exchanges by volume of business, overtaking long-time leader America's CBOT. A few years ago, such a change would have prompted an increased sense of competition between the American and European exchanges. But not now. Eurex has an alliance with CBOT, just as Eurex's main European rival, Liffe, has an agreement with CME. Challenged by new technology and the difficulty of maintaining customer loyalty in face of new market players, Europe and America's leading derivatives exchanges have acknowledged the need to pull together. Indeed Eurex is seeking more alliances in 2000.
This is a turbulent period for exchanges in which apparent winners and losers can swap places surprisingly quickly. Liffe seemed to be in terminal decline when it lost market share in the key European government bond future to Frankfurt in 1998. But it quickly changed its membership structure, its trading systems and even leaped ahead in technology with its electronic trading platform LiffeConnect now being distributed in the US through its partnership with the CME. The CME also has been redefining itself since early 1999 with a strategic plan that is leading it along the road to demutualization. CBOT is set along a similar path.
The following interview with Jörg Franke, chief executive of Eurex first appeared at www.euromoney.com/exchanges where it accompanies similar interviews with Hugh Freedberg, chief executive of Liffe, Scott Gordon, chairman of CME and Patrick Catania, executive vice president of CBOT.
In 1999, Eurex enjoyed a record-breaking year. In October for example, you'd already broken the world record for contract value in a business year. To what would you attribute this success?

Well, there are a lot of factors and one of them is luck! Another factor is that our policy, which we have followed relatively confidently for years, to extend our so-called remote membership content, which means to provide access to market participants wherever they are located, made remarkable progress in 1999 and 1998. We extended the numbers of market participants in the two years from 225 to 420, which of course was followed by an increase in the trading volume. That's one point.
The other point is that in connection with the Asian and Russian crises, a lot of investors were looking for so-called safe harbours. One of the safe harbours on the capital market side was German government bonds and the Bund future. Not only did we get the total market share from Liffe, but we also got a lot of market share from other futures on government bonds from the European stage. We now have around 95% of the total future volume based on European capital bonds. And so it's not only the move from Liffe, but from other exchanges too, such as Matif or MEFF and MIFF in Italy, to Eurex and with it to the Bund future and other products, which supported our trading volume.
But you didn't do nearly as well in the short-term products.
Quite frankly, we thought we would have a chance when Euribor replaced Libor to get more market share of the total volume being traded in Europe. This was true in the first weeks of January last year, but then Liffe did a very clever thing. They offered their market members the choice to move from Libor to Euribor contracts, and most of these market members did just that during January, so that all the contract volume and the open interest of the Libor products moved to the Euribor contract at Liffe. So our chance to get a better market share only appeared for some weeks at the beginning of January, and since then we've really had no progress as far as the market share is concerned.
Matif is doing worse, but this is no consolation. Before we introduced the Euribor, the market share of Matif on the short-term interest side was far better than ours. Now ours is better. However, this is a relative victory! We have to be aware that Liffe is far ahead of us, trading around well, 90% to 93% of the total volume. We are around between 5% and 6%.
How do you hope to overcome that this year?
It's not that easy because the money market is far more in London than in Frankfurt. So far it's been difficult to get the dividend market to Frankfurt when the main market is in London. That's one reason.
The other reason is that as far as the bond future is concerned, we have the advantage of providing a cheap electronic trading system. But now Liffe has an effective trading system as well.
Our view is that we are not trading the short-term interest rate products as well as we might, but in Europe, as well as internationally, we are providing very interesting products: the Bund future, and the new European index products with up to 95% of the total market share. So if you have a connection to Eurex why not use this connection to also trade the short-term products? This for the time being is the only argument. We are already offering what the market is looking for.
What about Jumbo Pfandbriefe that flopped in February 1999? The market didn't want those.
We thought that there would be some room for this product two years ago because there are some differences between the Pfandbriefe and the government bonds with a five-year maturity. However, it seems to be that it's not a big problem for the market members to use the BOBL futures as a hedging instrument for the underlying market of the Pfandbriefe. If this is true, and obviously it is true, then with the liquidity of the BOBL there is no real need to have a competitive product for the Pfandbriefe future.
Eurex has alliances with the CBOT, and with the Helsinki Stock Exchange, and it also received a no action letter last year from the CFTC to trade in the US as well. What does this say about Eurex's strategy on the world stage?
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