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Exchange-traded derivatives: Searching for the missing link

Many derivative exchanges have lost touch with what their customers want most. That is liquidity, but also cheap and efficient processing of trades. Ambitious schemes for linking exchanges over time zones haven't brought this, so over-the-counter business is booming. Andy Webb reports.

Making floor space for OTC

End-users of exchange-traded derivatives don't care where the instrument is traded, or which exchange is linked with which. What they want is liquidity.

Apparently ignoring this point, almost every exchange with global pretensions has been trying to form trading links across time zones with other exchanges. It's an expensive exercise and the benefits are questionable. Will these mostly unhappy liaisons continue, or will exchanges recognize that they must either merge or slug it out until only a handful are left standing? Perhaps what they should be concentrating on is mechanisms that improve clearing and margining across exchanges, which could benefit everyone.

The as yet incomplete ties between the London International Financial Futures Exchange (Liffe) and the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME) have the highest profile, but other European exchanges have also been active in forging links. The Deutsche Terminbörse (DTB) has signed an agreement with the CME for its DAX stock index futures to be traded in Chicago. The German exchange has also agreed a letter of intent with Soffex in Zürich to develop a common technical platform, which adds the DTB to an existing alliance the Swiss exchange has with the Chicago Board Options Exchange (CBOE) and the Options Clearing Corporation (OCC) in Chicago.

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