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 platformsLiffe 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, Liffes euro-based short-term interest rate (STIR) productsincluding the Euribor and the Stirling. In London, members will use Liffes Liffe Connect to trade the CMEs flagship Eurodollar contractas well as the Mercs 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-margininga back-office function that will provide cost savings for members who trade both dollar and euro-denominated STIRs. Cross-marginingwhich will cover the CMEs Eurodollar and Liffes Euribor and Euro Liboris 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, Liffes chief executive officer. Netting for the Euribor and Euro Libor products will occur at the London Clearing House, Liffes clearing arm; the CMEs 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 participantswhich include the likes of clearing houses and end-user liquidity providerswill 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 firms 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 ventures trading engine or clearing system. The company, Freedberg says, also will not be averse to trading products listed on other derivatives exchangesif thats 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 Liffes 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. Thats the future. Its not a question of if, its just a question of when, says Freedberg.