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Europe Competes: The Merc Has to Up Its Futures Game
Eurex's move into the foreign exchange futures market will be watched with interest by forex market participants, because it is the first serious competition to the Chicago Mercantile Exchange's domination of the market.
First reported in the Financial Times last Friday, Eurex yesterday confirmed it would offer contracts in a range of leading currencies from September 23.
"FX is one of the fastest growing markets in the world, and it is the only major financial asset class where Eurex has not historically been represented," said Rudolf Ferscha, chief executive of the exchange.
Last year, total foreign exchange trading volumes reached a record Dollars 1,900bn a day, according to the Bank for International Settlements' survey. The fastest growth came from hedging instruments such as forwards, swaps and options.
Forex futures are almost as old as the forex market itself and were first offered by the CME, or Merc, on May 16 1972 to meet new hedging needs as the Bretton Woods system of fixed currency rates broke down and currencies began floating freely.
Trading in futures has taken off in the past four years as smaller traders have been attracted to the Merc as a way of betting on fast-moving forex markets.
More than 50 per cent of its forex volume - and the fastest growing segment - is generated by the "buy side" such as fund managers and others who are usually clients of banks, the "sell side."
Buy side participants dealing on their own account with limited credit can access the Merc more readily than the "spot" forex market, where currency is traded in multiples of
1m and has long been dominated by big banks who can afford the massive credit risks inherent in trading
billions a day.
Last week, the CME announced a record 748,050 contracts were traded on June 8, worth Dollars 87bn in notional value. Eurex's move therefore represents a strike at one of the Merc's key business operations.
Yesterday it announced it would waive all trading fees for forex contracts for all market participants for the duration of 2005.
It will also offer larger contract sizes than the CME to facilitate big hedging requirements, and will hand back 40 per cent of forex futures revenues in incentives to participants for the next two years. One US banker said Eurex's incentives were "all part of the right ingredients to attract volume".
"Listing FX contracts on Eurex US will offer the global marketplace the opportunity to trade FX on a liquid and transparent market with a highly effective distribution network," said Mr Ferscha yesterday.
But the Merc's customers already have 24-hour trading through its Globex system, through which 90 per cent of its forex futures volume is traded.
Users might however
welcome an alternative to the Merc's dominance, a pattern that has a precedent in the forex industry when EBS, the interdealer platform, was set up in the 1990s by a group of banks to balance the growing dominance of Reuters.
The issue here, though, is whether the challenger can win enough liquidity to give participants confidence in its market.
In the spot market, both EBS and Reuters exist today, which reassures traders that if something happened to one, the market could switch to the other. But both are known for liquidity in particular currency pairs and often are not considered direct competition.
The Merc has not been sitting still. This year, its contracts began trading live over Reuters' dealing system and widening its market base. Recently it announced it would cut trading charges to 60 cents per side of a trade - from Dollars 1.60 - in August.
Eurex also has to win over the Chicago trading community, a group the Merc has been going all-out to impress this year with "summits" and sessions on FX trading.
"The challenge for Eurex will be to try to develop markets in Europe analogous to those the Merc has developed in the US, plus to try
to attract flow from a tight-knit Chicago-oriented trading community," said Justyn Trenner, of ClientKnowledge, an industry consultancy.
Additional reporting by Jeremy Grant in Chicago
Copyright © 2005 Financial Times Ltd.
06/16/2005 10:02:00 PM [Financial Times UK - CAPITAL MARKETS & COMMODITIES]
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