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Is Deutsche Börse starting to reveal its FX cards?

The Wall Street Journal today reported that futures exchange Deutsche Börse is considering relaunching currency futures in a bid to outmanoeuvre its long-term rival, the CME, which last month launched its European exchange, saying it would lead off with currency futures itself. To say Deutsche Börse is merely being reactive would be off the mark, however.

Deutsche Börse has been quietly working away with its European clients for some time to bring an FX product to the market, after its failed attempt in 2005. Last year it took a stake in FX options ECN platform Digital Vega, and people familiar with the issue say that the exchange has been cautious in the timing of a launch. The CME has forced its hand it seems.

“No one can say right now if [Deutsche Börse’s] plans will proceed or, if the currency contracts are launched, that they will be successful. It will be a very complex matter involving the regulatory bodies and business partners,” says the source close to the matter.

Deutsche Börse maintains a unique foothold in the futures market in Europe, dominating the interest rate space. In recent years it has explored potential tie-ups with the London Stock Exchange and NYSE Euronext, the only two exchanges in the region with a larger market cap than the German facility. Comparatively, in Europe, CME is new to the playing field.

The Chicago company said in August that it was applying for a UK Financial Services Authority licence to launch a new derivatives futures exchange in London and that – if approved – will launch with a range of FX futures products by mid-2013.

But the currency market’s reaction to the news of CME’s plans was underwhelming purely because traders in Europe do not view the FX market as being a welcome environment for exchange-traded currencies products, with it almost exclusively trading over-the-counter (OTC) products. Hence the perceived opportunity.

In the US, the dominance of commodity trading advisers means there is a more established environment for vanilla exchange-traded futures contracts like those offered through CME.

CME says 30% of its FX volumes come from Asia and Europe. So far this year, that would amount to average daily notional volumes of more than $36 billion.

Futures and Options Association CEO Anthony Belchambers says he is not surprised that Deutsche Börse would consider launching a new range of currency futures products for trading in Europe.

Belchambers says that, with new financial markets regulations coming through soon in the EU and US that favour the security of exchange-traded and centrally cleared markets over OTC transactions, exchanges showing willingness to fight for previously barren FX territory is hardly rocket science.

“Exchanges look at the size of the FX market – of which a large percentage is based in London – and the fact that some percent of that market will be encouraged in the future either through prudential rules or other rules to be traded multilaterally,” says Belchambers.

It is natural for the exchanges to want to be well placed in the EU to take advantage of regulatory changes once the migration to a centrally cleared market model via regulatory mandates for many products –including a small share of the FX market – takes place, says Belchambers.

“The extent to which Deutsche Börse’s or CME’s efforts to transact FX futures in Europe will be successful are going to turn on all sorts of factors, not the least of which will be what are the prudential requirements going to be for non-exchange-traded contracts,” says Belchambers.

If those transaction costs for bilaterally traded futures contracts such as FX futures are prohibitively high, then the market will be economically compelled to rely more on exchange-traded products if they are cheaper to buy and sell, says Belchambers.

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