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Robert Sales
Robert Sales
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Liffe Nears All-Electronic Completion, Moves Forward with CME Alliance

The London International Financial Futures and Options Exchange (Liffe) and the Chicago Mercantile Exchange (CME) have scheduled March rollouts of two of the strategic initiatives they embarked upon after forming a partnership last summer.

The London International Financial Futures and Options Exchange (Liffe) and the Chicago Mercantile Exchange (CME) have scheduled March rollouts of two of the strategic initiatives they embarked upon after forming a partnership last summer. Simultaneously, the Liffe is planning to complete its metamorphosis into an all-electronic market within the next 12 months.

On March 20, the CME and Liffe plan to go live with cross-exchange access. For the past several months, the Liffe and the CME have been feverishly working to build an electronic interface that connects their respective electronic trading platforms—Liffe Connect and Globex2 (ETW, 8/9/99). By interconnecting their platforms, the exchanges will enable their collective members to use a single terminal to tap into their full complement of electronically traded products.

In Chicago, members will use Globex2 to trade, primarily, Liffe’s euro-based short-term interest rate (STIR) products—including the Euribor and the Stirling. In London, members will use Liffe’s Liffe Connect to trade the CME’s flagship Eurodollar contract—as well as the Merc’s S&P 500 Stock Index and Nasdaq 100 Index.
On March 31, following their cross-exchange access rollout, the Liffe and the CME plan to go live with cross-margining—a back-office function that will provide cost savings for members who trade both dollar and euro-denominated STIRs. Cross-margining—which will cover the CME’s Eurodollar and Liffe’s Euribor and Euro Libor—is expected to yield margin offsets of up to 60%.

“Depending on the nature of the margining portfolio, each night the portfolios for dollar and euro-denominated STIRs will be merged and a netting process will take place,” explains Hugh Freedberg, Liffe’s chief executive officer. Netting for the Euribor and Euro Libor products will occur at the London Clearing House, Liffe’s clearing arm; the CME’s Clearing House Division will handle netting for Eurodollar contracts.

Beyond cross-access and cross-margining, the Liffe and the CME are also getting prepared to launch a for-profit joint venture. While providing few specific details on the joint venture, Freedberg says the entity is scheduled to launch this summer.

At this time, it remains unclear what exact form the new entity will take. Freedberg says that the joint venture will not act as an exchange, but will offer new products and services to derivatives market participants. Those same participants—which include the likes of clearing houses and end-user liquidity providers—will also be given the opportunity to purchase equity in the firm. Freedberg says that though the CME and Liffe have yet to finalize deals with any minority investors, the exchanges have fielded several inquiries from firms interested in gobbling up a piece of the joint venture.

The firm’s offerings could include “financial or non-financial” products, and its products and services may be made available to clients on an a la carte basis, says Freedberg.

For example, he says, a customer may be able to choose whether he wants use only the joint venture’s trading engine or clearing system. The company, Freedberg says, also will not be averse to trading products listed on other derivatives exchanges—if that’s what its customers/owners demand.

In addition to moving forward with its CME alliance, the Liffe is putting the finishing touches on its transition from a primarily open outcry driven exchange to an all-electronic market. Freedberg says the only products still traded in Liffe’s open outcry pits are financial options and commodities. Financial options are schedule to be ported to Liffe Connect on May 2. Commodities, on the other hand, will be migrated to the electronic trading platform in around “nine to 12 months,” says Freedberg.

During its migration from open outcry to Liffe Connect, the exchange, at times, had doubts about whether an electronic trading platform could replicate the complex strategies that are used to trade STIRs in the pit. But the exchange has not seen a decline in volume or open interest for those contracts since they were listed full-time on Liffe Connect, and is now completely sold on automation. “The market trend is towards electronic trading. That’s the future. It’s not a question of if, it’s just a question of when,” says Freedberg.

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