Europe's exchanges link up in effort to topple Liffe

London's position as the leading financial centre of Europe came under threat yesterday as the German, French and Swiss futures and options bourses said they had teamed up to challenge Liffe's dominance of European derivatives trading. Meanwhile, a senior City figure has warned that the spiralling cost of regulation could jeopardise London's competitiveness. Tom Stevenson, Financial Editor, reports.

The chief executive of the London International Financial Futures Exchange (Liffe), Daniel Hodson, hit out yesterday at plans by his counterparts in three European countries to create a unified derivatives exchange in the run-up to monetary union. The planned alliance poses the most serious threat yet to the dominance of the 10-year-old London market.

The proposed super-exchange would be the largest market in futures and options in Europe, toppling Liffe from its leadership of the market in financial derivatives at a crucial time just months before the exchange rate parities for EMU are announced next spring.

In a simultaneous announcement in Frankfurt, Paris and Zurich yesterday, the main challengers to Liffe in Europe said they had developed plans to form a joint market for fixed income derivatives. The move followed a recent collaboration on European equity indices and paved the way, the three said, to a fully fledged alliance which would integrate their cash markets.

In a joint statement, the exchanges said: "This alliance gives us the pole position for European Monetary Union. The alliance will offer the largest derivatives market in Europe." Last year the three partner exchanges had a joint volume of 194 million options and futures contracts.

A major significance of the link is the way it has overcome differences between trading platforms in the three countries, allowing parallel trading of products on the German and Swiss electronic systems and the open-outcry floors used by France's Matif market. New products launched by the combined group will be traded electronically on one of the exchange's systems but dealers in the other participating companies will have equal access through a common "log-in". Only existing products will continue to be traded in Paris's open-outcry pits.

That is certain to focus attention once more on Liffe's insistence that its own system of floor trading is more efficient and provides greater liquidity than rival electronic platforms.

Traders say the continental agreement is mere window-dressing for the more fundamental battle between the different trading systems of international exchanges in London and Frankfurt, as the Continent gears up for European economic and monetary union in January 1999.

Liffe is well aware of the threat the German bourse (DTB) provides. The DTB's trading volume in German Bund futures is catching up with Liffe's, at 44.4 per cent of total market share in August.

The Continental exchanges announced their link-up with impeccable timing, one day ahead of Liffe's launch of medium-term German bond, or Bobl, contracts, in direct competition to similar products on the DTB. ``The link leaves Liffe at a disadvantage but I don't think it leaves them at any bigger disadvantage than it did before," said one German banker.

``The key there is the technology. The biggest thing that's threatening Liffe right now is simply the technology. This initiative does show the momentum is going towards electronic trading."

Liffe is moving to strengthen its own electronic technology, the mainly after-hours Automated Pit Trading (APT) system, but remains well behind the DTB in this area.

Joerg Franke, chief executive of DTB, the German derivatives exchange, and Eurex, its alliance with its Swiss counterpart, upped the stakes in the growing battle between the bourses yesterday by offering to join forces with Liffe if it was prepared to abandon its open-outcry method of trading in favour of an electronic system.

Mr Hodson said Liffe was already the dominant player and accused the proposed merger of limiting choice.

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