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December 1, 2004

The Europeans Are Coming! Two Continents Collide on Derivatives, Raising Hell in Chicago

By Mark Longo

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  • The Europeans Are Coming! Two Continents Collide on Derivatives, Raising Hell in Chicago

European and American disputes go beyond George Bush, tariffs and Iraq. The

two continents are also clashing over the best derivatives exchange model, whether American exchanges are trying to mask their shortcoming behind regulatory barriers, and if Europe is strong enough to process large derivatives volumes. These disagreements were recently aired at a conference in Chicago, in which European officials strongly criticized their American counterparts.

"The different regulations for member firms in Europe and the U.S. have been a problem for transatlantic trade for years," said John Foyle, executive director of Euronext.liffe. "The heads of Eurex and Euronext.liffe are committed to changing these regulations, and they don't care who they frustrate in the process."

These caustic comments came at a panel at the FIA Futures & Options Expo in the Windy City. Foyle also promised to press for regulations more favorable to European firms. Indeed, when the moderator suggested that this might be a problem for the Americans, Foyle could not contain himself. "If new regulations make the competitive situation for U.S. firms more difficult, then so be it," he snapped.

The Expo panel provided a rare opportunity to look more closely at the transatlantic tension in the derivatives markets. The Americans and Europeans also clashed, for instance, when the moderator asked the question: "Who is more important - the guy who makes the markets or the guy who hits the bids and lifts the offers?" Of course, this disagreement is not a surprise. Most American derivatives exchanges have a fee structure that differentiates between market makers and customers. The thinking is that lower fees for market makers generate greater liquidity for the marketplace. "It is important for exchanges to incentivize people who put capital at risk," said Bernard Dan, president and CEO of the CBOT. "These people provide deep and liquid markets for our customers. Non-members, in turn, pay for access to those deep markets." Craig Donohue, president of the CME, also believes that the transition from selective membership organizations to public companies will make the American derivatives marketplace more accessible to non-members. "The transparency that comes with being a publicly-traded company is very good for the industry and good for the exchange," he said.

Still, the European exchanges disagreed. "We are moving away from membership categories and toward a model where liquidity drives pricing," said Rudi Ferscha, CEO of Eurex. "The people who provide more liquidity will pay less than those who only trade in small amounts." Foyle added that, "it is an anachronism that certain major U.S. markets still require membership, or becoming a shareholder, in order to receive priority pricing."

American exchange officials raised their own issues in the age-old debate of open outcry versus electronic trading. Both Eurex and Euronext.liffe are electronic exchanges while the CBOT, NYMEX and CME are traditional open outcry exchanges. These fundamental differences of trading philosophy have fuelled heated barbs.