Does France's Futures Market Have A Future?
At a trendy, American-style watering hole near the Champs-Elysees, a trader from Paris' Matif, Europe's second-largest futures exchange, leans over to share a secret: He's looking for a job in London or Chicago. Like any trader, he wants to be where the action is. And the Matif, he says, hasn't exactly been jumping lately.
He's right about that. Futures exchanges thrive on interest-rate volatility, as traders bet for or against changes in the value of bonds, currencies, and commodities. Established in 1986, the Matif saw trading leap during the early 1990s as global interest rates gyrated and currency crises rocked Europe. During its heyday in 1994, an average of more than 200,000 futures contracts for the French government long bond, the Matif's biggest product, were traded daily. That made the so-called Notionnel the leading derivative product in Europe. And it gave rise to French hopes that Paris would someday become a global mecca for sophisticated financial players.
MARK PREFERENCE. All that changed in 1995, when stable bond prices hurt all of Europe's futures exchanges. But the slump at the Matif is continuing while its two major rivals, Frankfurt's Deutsche Terminburse (DTB) and the London International Financial Futures & Options Exchange (LIFFE), are recovering nicely. The reason: The prospect of European monetary union, of which France is the Continent's biggest champion, is virtually eliminating the volatility between French and German interest rates that has been the exchange's main financial game. And while investors wait for the new single currency, scheduled for launch on Jan. 1, 1999, they are already using bonds and derivatives written in marks, not francs, to diversify their international portfolios. The mark instruments are traded in both Frankfurt and London.
That's hitting the Matif hard. After tumbling 33% last year, trading volume in the Notionnel has risen just 4% through nine months this year. Average daily volume is down to 139,000. By contrast, volumes in Bund futures on the DTB have regained their 1994 record levels and set new highs in London. Citing investors' preference for dealing in Germany's battle-tested mark, one Matif employee shrugs: "Why bother trading in French bonds when you can get the same results in German bonds?"
Strategic miscues have also hurt the Matif. Until last August, the exchange, which conducts 30% of all European futures trading, had banked on an alliance with Frankfurt's DTB. That would effectively put the two exchanges on an equal footing with the LIFFE's 50% market share. But the agreement collapsed when the two could not compromise on how the Matif's open-outcry system could be combined with the DTB's electronic trading. Since then, the Matif has had to fly solo.
Still, Matif Co-Director General Jacques Werren sees his exchange's problems as temporary. He blames the Matif's slumping volumes on foreign investors who were scared away from French bonds after last year's crippling strikes, so they have much smaller positions to hedge. Foreign investors sold a record $34 billion worth of French bonds in the first seven months of this year.
HEAD START. Werren believes that the Matif will regain its prominence when Europe's three futures markets begin vying for market share in Euro-denominated bonds--assuming the Euro is launched as planned. That's because the French have a head start. The French Treasury, the Banque de France, commercial banks, and brokerages will convert all outstanding debt into Euros on the first day the single currency takes effect. Germany, by contrast, is only beginning to discuss redenominating existing debt in 1999. "With the Euro, all the cards will be redistributed," Werren says.
The Matif could also score by default if Britain decides not to participate in the single currency. The European central bank that will supervise monetary policy after the Euro's introduction might restrict access to Euros by countries that do not join the monetary union. That would leave London out in the cold when it comes to trading Euro futures.
One other development could rescue the Matif--a hitch in monetary union. If the path to the Euro takes another rocky turn, a new wave of market turbulence would surely bring back business to the futures exchange. An obstacle to European monetary union would be bad for France. But it would be good news for its futures traders.