Futures exchanges worldwide are fighting for institutional investor market share in anticipation of possible deregulation in the United States, the planned economic and monetary union in Europe and the growing use of investment technology worldwide.
While a recently introduced U.S. Senate bill (S. 257) would be a boon for U.S. exchanges if passed, EMU presents a major challenge for European futures exchanges. And the question of how futures exchanges can use technology to save customers money is becoming a bigger one, as exchanges continue to increase their linkages and interdependence.
Futures exchanges are pushing hard for passage of the Senate bill. One provision of the amendment to the Commodity Exchange Act would exempt "professional markets" and large investors from CEA regulation.
"We need to have regulatory parity," and the bill would help level the playing field between exchange-traded derivatives and over-the-counter derivatives, said Patrick H. Arbor, chairman for the Chicago Board of Trade.
The exchanges argue that the regulatory structure, created for commodity markets, doesn't fit the predominantly financial futures trading that takes place on futures exchanges.
"We feel that the way our markets have evolved, we're almost exclusively an institutional marketplace," said T. Eric Kilcollin, president and chief executive of the Chicago Mercantile Exchange.
The benefits of regulation don't exceed the cost, Mr. Kilcollin said.
The bill also would streamline the contract approval process, putting most of the burden on the Commodity Futures Trading Commission to come up with a reason why the contract should not be approved, "a more rational approach" than the current process, Mr. Kilcollin said.
Getting a contract approved by the CFTC can sometimes take "an excruciatingly long time," he said.
CFTC opposes provision
CFTC Chairwoman Brooksley Born is opposed to the professional markets provision of the bill. She contends futures exchanges require different regulation than OTC derivatives because of a "concentration of risk" not present in two-sided OTC transactions.
Despite some opposition, the bill is getting broad support.
"The CFTC is alone on this one," said Donald Horwitz, managing director at consultant The Woodward Group, Northbrook, Ill., and editor of the Futures and Derivatives Law Report. Most financial institutions, as well as Federal Reserve Chairman Alan Greenspan, are behind it, he said.
But stock exchanges and the Chicago Board Options Exchange, all regulated by the Securities and Exchange Commission, are opposed to the bill if it will lead to futures trading on individual stocks. Existing law bans futures on stocks, and it should stand, said Alger B. "Duke" Chapman, CBOE chairman.
While Mr. Horwitz said he believes there is a good chance the bill will pass in close to its current form, he noted that there's no guarantee that exchange savings will be passed on to the end user.
European exchanges battle
Across the Atlantic Ocean, futures exchanges are battling to be the market of choice in euro-denominated trading, with the euro scheduled for creation in 1999.
The issue already is coming to a head for European futures exchanges because they already are beginning to trade contracts that expire in 1999.
The London International Financial Futures and Options Exchange; the Marche a Terme International de France, Paris; and the Deutsche Terminborse, Frankfurt, all would like to be the home of euro-based fixed-income trading.
As the volume leader in major German fixed-income contracts, LIFFE executives feel their exchange will have the advantage, said Daniel Hodson, LIFFE president.
The Chicago Board of Trade placed its bets with LIFFE. "The LIFFE exchange, we think, will be the survivor," which led to the CBOT's linkage with LIFFE, Mr. Arbor said. This summer, the CBOT and LIFFE members will be able to trade each other's respective long-term bond futures contacts.
But MATIF executives say France's full participation in EMU - and the United Kingdom's tentativeness on joining - give MATIF the advantage as the predominant euro exchange.
Gerard Pfauwadel, president and chief executive of MATIF, said France has decided to adopt the euro immediately in all of its financial markets, including repurchase agreements. It will be a fight for initial liquidity, and once liquidity is established, it is difficult to take that away, he said.
MATIF, too, has agreed to allow after-hours CME trading of its liquid Notionnel bond contract and a planned five-year fixed-income contract.
MATIF and CME have initiated a multiexchange technology swap. The CME and the New York Mercantile Exchange will get the electronic trading system of MATIF and the SBF-Paris Bourse, while the Paris exchanges will get the U.S. exchanges' clearing system, Clearing 21.
Concurrently, the CME and CBOT are working to merge their clearing operations, a major step that could reduce overhead.
The CBOT's own electronic trading system, Project A, is being considered as a replacement for the CBOT's evening open outcry sessions.
M. Scott Manolis, a commodity futures manager for Jeffries & Co. Inc., New York, said he believes the more efficient electronic trading eventually will be the dominant means of trading on futures exchanges.
While most exchange officials say they are committed to open outcry, Mr. Pfauwadel of MATIF is more pragmatic. The current culture is that open outcry is preferred, he said. But, "we will be ready for the electronic changeover, if it does happen," he said.