From the September 01, 2007 issue of Futures Magazine • Subscribe!

Europe: Beyond the big two exchanges

European regulatory agencies often resemble a slow-motion squadron of precision flyers in formation: everyone working towards the same goals, each with an eye on his wingman. There’s even an element of elegance in the way they dovetail with each other while maintaining their independence — an ability that Charlie McCreevy, the European commissioner for the Internal Market and Services, has cited as being one of the European Union’s chief competitive advantages in a globalizing world.

Exchanges have managed a similar skill set, cited by New York Stock Exchange boss John Thain, as being one of Euronext’s key assets. Often overlooked, however, are the remaining smaller exchanges operating across the Continent, each of which is pursuing its own growth strategy.

Over the past year, exchanges like the London Metal Exchange (LME) and EuroMTS have introduced products worthy of attention, while Eastern European exchanges have ratcheted up their merger and acquisition activities in preparation of joining the global community.


The Warsaw Stock Exchange (WSE) remains one of the Continent’s best-kept secrets despite the fact that it led Central Europe in IPOs in 2006 with 38, and already had 39 by the end of July this year. Its 20 IPOs in the second quarter of 2007 placed it second in the entire European Union, just behind the London Stock Exchange (LSE).

In August, it will begin publishing data on its unregulated alternative trading platform, the NewConnect WSE Stock Market.

Management has long stated its desire to both emulate and integrate into Euronext: first by becoming the hub of an Eastern European alliance, and then by integrating that hub into the larger partner. The plan has, however, been held up by the government’s plodding pace towards privatization — a path now in doubt, as the new conservative government says only Poles will be allowed to buy WSE shares, while the government will maintain 51% ownership.

Still, the exchange is among those bidding for the 44% stake in the Sofia Stock Exchange that the Bulgarian government has put on the block as the entire region is growing and has become a major importer of German goods.

The Austrians, however, aren’t letting Warsaw become the Central European trading hub without a fight. Vienna’s Wiener Börse has securities and futures ties up and down the Danube, but they’ll have to overcome old prejudices dating back to the Austro-Hungarian Empire if those endeavors are to bear fruit.


Italian-born and London-based EuroMTS is one of the more intriguing projects in Europe. The group beat off deep-pocketed U.S. competition to build the only organized, pan-European exchange for government bonds by helping local governments restructure their debt.

More recently, it has harvested the traffic on its platform to pioneer a new form of bond index that mimics equity indexes — the index price is generated from executable prices on the cash platform, and not from indicative prices. EuroMTS does not list derivative products on its own platform, but licenses derivatives to other platforms on the belief that keeping the index provider and the financial products providers separate, the index will gain credibility.

There are now bond ETFs based on EuroMTS indices traded on Euronext, Borsa Italiana and Deutsche Borse, while Euronext.LIFFE has gone a step further, launching futures on the indices, and banks across the European Union are using the indices as references in OTC structures and derivatives.

MTS made headlines earlier this year when Borsa Italiana exercised an option to buy back a controlling interest in it from Euronext just ahead of Borsa Italiana’s merger with the LSE.

On one level, that’s a major LSE coup, but the man who built MTS into what it is, Gianluca Garbi, got the boot after a well-publicized public feud with Borsa Italiana boss Massimo Capuano. Garbi landed comfortably at the top of the govie bond department of Dresdner Bank, and you could argue that his work, building the pan-European network, was complete. The team that developed the indexes is still intact, but the MTS now in the possession of LSE isn’t the same MTS that changed the way bonds are traded in Europe.


As the United States experiments with various regional cap-and-trade schemes to reduce carbon emissions, the Europeans are forging ahead with phase two of the European Union Emissions Trading Scheme (EU ETS), which doesn’t begin until January 2008, but cash and futures products are already up and running. The European Climate Exchange (ECX) has become the platform of choice for European Union Allowances (EUAs), and its Carbon Financial Instruments (CFI) futures have begun to trade like a real market. Average daily volume in July was 5.4 million metric tons (Mt), compared to 1.5 Mt a year earlier.

In early August, ECX parent Climate Exchange PLC moved Patrick Birley into the top spot. A veteran of both LME and LCH.Clearnet, Birley brings the experience the exchange will need to integrate itself into the global energy markets.

While the platform is based in Amsterdam, the trading center is clearly London. “London has captured a huge lead in carbon markets, with around 80% of market handled here,” says Peter Green, CEO of The Kyte Group.

He sees a repeat brewing in the United States. “If the U.S. adopts a mandatory carbon scheme, then there’s little doubt that one of its exchanges would catch up fast,” he says. “If the scheme designers could develop a phase two market/exchange system whereby the E.U., U.S. and other industrial centers create some degree of fungibility, the role of markets in reducing CO2 emission could develop even quicker.”


Finally, the stodgy LME has shown a willingness to change, now offering mini contracts based on its benchmark copper, aluminum and zinc products to be joined by a steel contract next year. Unlike most minis, these are completely different from the parent contracts.

While the LSE’s complex flagship products are designed for and used by cash dealers, the new products are standard futures contracts that settle to the parent contracts. They’re thus marked to market in real time (in contrast to the parents, where you can only take profits on settlement day). The contracts are targeted to small hedgers, and have so far failed to attract attention.

As new market users look to hedge their metals risk, the LME says it’s got a more effective hedging vehicle than the one now available at Comex.

In justifying its merger to the Department of Justice, the Chicago exchanges argued that competition in derivatives play out on a global stage, that is true and Europe has more players than the few names with which we have become familiar.

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