The first month of euro trading has come and gone, and the battle for short-term futures contracts rages on. Liffe, Eurex and Matif – the UK, German-Swiss, and French futures exchanges – have been competing for market share of three-month futures contracts since January 4. Already there have been disputes about which has made the most successful transition to the euro and which is most liquid.
The futures exchanges are conducting the transitions in slightly different ways. In mid-January, Liffe carried out the mandatory conversion of all three-month Euromark and Eurolira contracts into euro Libor and euribor positions. Matif, which trades Pibor contracts, will finish converting to euribor in June. Already, over half the Pibor contracts have been voluntarily changed by Matif members. Both exchanges had a lot of existing business which then was converted to new contracts, giving them a headstart on Eurex which was created only last year.
Liffe in particular has had to defend its title as the centre of the interest rate futures market, and so far it is still in the lead. Its trading volumes for both euribor and euro Libor contracts have been consistently higher than its rivals, and is still breaking its own records. At the close on January 27, 110,000 euribor and 41,000 euro Libor contracts had been traded. The same day Eurex traded 18,560 euribor contracts and Matif traded 18,300.
So for now Liffe seems to be winning the battle to trade contracts. It shows how the ground for the competition with Eurex and Matif has shifted quickly. It is no longer over which interest rate will be used for short-term futures contracts. In 1998 Liffe got ready to pit its London-centric euroLibor rate against euribor, the rate favoured by Eurex and Matif that’s calculated by banks all over euroland. The contest involves complex practical arguments, but also the political baggage of London versus euroland.
For months London and Frankfurt were adamant about the superiority of their respective interest rates. But in December Liffe and Eurex hedged their bets and decided to trade both euribor and euroLibor, arguing that they wanted to offer the widest choice. Matif stuck to its guns, arguing that a focus on one contract would maximize liquidity.
It was a smart move by Liffe, as euroLibor has rapidly became the less popular contract. Euribor trading volumes outstrip euroLibor by three times on Liffe and euroLibor is fading fast. Eurex decided in mid-January to delist euroLibor contracts as demand was so small. Now Liffe is quickly establishing itself as the new leader in euribor, despite being the traditional home of EuroLibor.
But as Eurex is keen to stress, competition is still in its early days. Eurex says its lack of existing contracts has put it at a disadvantage, and given time it will catch up with Liffe. “We have a good chance to stay in the markets and gain significant market share,” says Jörg Franke, the exchange’s chief executive. Its business has grown since the start of 1999 and the daily average trading volume at end-January was 20,000 contracts.
Matif’s trading volumes have fluctuated during January, reaching highs of 38,000 contacts and lows of 7,000. Its market-making arrangement with four French banks has worked well so far and helped to provide liquidity, as has its focus on euribor. Matif has been hoping to attract customers from other exchanges, and sources claim there has already been evidence of Liffe Euromark contracts being converted to Matif euribor.
An alliance between Matif, Mif (the Italian futures exchange) and Meff (the Spanish futures exchange), known as Euro-Globex, means that Spanish Mibor contracts will soon be eligible for conversion to the Matif euribor contract, followed eventually by Italian contracts.
Liffe has managed to survive the decline of euro Libor and still emerge as the leader of the euribor future contract. But in this fast changing environment it shouldn’t rest on its laurels.
