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?
What we are looking for, and this together with the CBOT, is to be successful in east Asia, say in the Asia Pacific region. That’s what we did last year, and that’s what we will do this year. We would like to have a third partner in Japan or Hong Kong, or Sydney or Singapore, or anywhere else, and I’m pretty sure that we will reach this goal within this year.
And they will join the alliance with Eurex and CBOT?
Well this is subject to other discussions for the time being. It is independent of our intention to have access points and screens for new market members in the Asia Pacific region. You don’t need any connection to an actual exchange, to have technical access to other market members, or potential market members who are located in these places.
Which means again, independent of any connections to other exchanges in east Asia, we will try to get new members, and we will try to get them from Japan to Australia, and maybe even Honolulu, I don’t know. It would be a good reason to go there for a holiday!
Where is Eurex positioned in the technological progression of exchanges?
Well, we have some advantages, but there is also the LiffeConnect system, which is very good, or the NSC system which is very good too; from this point of view I think that we have no big advantages. However, what Eurex does have is that it is the biggest network because we have by far the biggest number of market participants who are not located in Germany or Switzerland. By the end of last year we had more than 50% of trading come from London, the US, Amsterdam, Italy and Spain, and this share will increase. It might be now 45% to 55%, and let’s say by the end of this year I’m pretty sure that 70% of our members will be located outside of Germany and Switzerland. This means we are not a German-Swiss exchange, but more a European exchange.
As time goes on and the number of American members increases, and they will, especially in connection with the CBOT, and as the number of Asia Pacific members increases as well, then we will become a real international network. Some say the DTB, or now Eurex, was the first ECN world-wide, (a limited model), and most probably that’s true.
What do you think the competition will be like in 2000? For example, a lot of people talk about Eurex being a big competitor for Liffe, but who will be Eurex’s biggest competitor?
In Europe, of course Liffe. I don’t know if it’s true that there is a competitive situation with American exchanges: it’s difficult to say because for the time being the markets between the US and Europe don’t seem to be in a real competitive situation because of the time difference.
The situation will change if one of the big American exchanges comes to Europe and sets up an exchange, similar to what Nasdaq is doing on the cash market. I have no idea if the Nasdaq trial in Europe will be a success or not, but given the fact that this will happen on the derivatives market as well, then it is theoretically a real competitive situation.
What do think of the recently announced demutualization of the CBOT?
Necessary!
Why do you say that?
Look at the trends in the US; what’s happening around the traditional exchanges. There’s a lot of ATNs, and a lot of ECNs. One of the main reasons for them is that a lot of big players are not content with the structure of the exchanges. They feel that their influence is small in comparison with the traded volume.
And so the exchange had to change, I think all the exchanges are doing so – they are aware of this pressure
