NYSE Liffe is set to launch German government bond futures as a direct challenge to Eurex’s market-dominating Bund, Bobl and Schatz contracts, writes Joe Parsons and Jonathan Watkins.

In the biggest move yet from Liffe’s new owners, Intercontinental Exchange (ICE), the group will aim to wrestle market share away from its arch rival's established and super-liquid suite of Bund, Bobl and Schatz futures.

The decision to go live with 2, 5, 10 and 30 year government bond futures on May 27 comes 15 years after Liffe lost the Bund to Eurex.

The timing of the launch also coincides with strict new rules on high frequency trading in Germany, which according to one industry source, may give Liffe an opportunity to build liquidity on its offering.

“The timing is interesting because of the HFT rules in Germany. Eurex may be weaker because of the rules,” the source with knowledge of the situation told FOW.

“Eurex has had a Euribor for a very long time, so why shouldn’t Liffe offer Bobl and Schatz.”

Liquidity battle

The source added that the move seems ‘politically-charged’ following the move from Liffe to Germany 15 years ago.

A Eurex spokesperson declined to comment on Liffe’s planned launch.

A three-way battle will now ensue within Europe as Liffe, Eurex and Nasdaq OMX’s new NLX platform all compete for market share in the German government bond futures space.

The two London-based platforms will face an uphill battle to compete with German exchange’s bond offerings though, which were collectively traded over 40m times during March.

“So much of the outstanding interest is in banks who are not in London they are in Germany, who want to see it on the continent,” another industry expert told FOW.

“Germany issues the most debt, German banks are the primary dealers into that, they are the ones who are going to hedge it so while you may get a whole bunch of market makers you are not going to get the flow.”

Liffe did not provide any further comment on the launch.

Additional launches

Gaining liquidity on its new German bond futures will be the key factor in the success of Liffe’s new offerings.

“I think the main factor to determine volume and open interest is how much it differentiates with the existing products, because if they are the same why would one go to another exchange if they are happy trading the current product," said David Robin, co-head financial futures and options execution, Newedge US.

"Success will be where liquidity is and how much it differentiates with other products - such as that from Eurex - in order to attract that liquidity."

The products will be launched as part of a new suite of government bond futures which also includes Swiss, Italian and Spanish products.

Liffe will also launch new Swapnote futures on April 22, which will include Swiss, Sterling, Euro and US Dollar contracts with a range of maturities.

Swap futures race

NYSE Liffe has traded its Euro and US-denominated Swapnote futures contract since 2001 and will extend its swap futures offering with longer maturities and other currencies.

FOW understands Eurex is targeting an early summer launch for its first deliverable swap future, and CME has also scheduled an April launch for its euro denominated interest rate swap future.

Nasdaq NLX is also believed to be considering its own offering, as the three exchanges look to compete in yet another product.

“We are seeing an increasing amount of opportunities for exchanges to look at launching new products on the back of regulatory changes and I expect to see this to continue over the next 12 – 24 months,” said Charlotte Crosswell, CEO of Nasdaq NLX.

“We have seen a decline in interest rates volumes on the back of a stable interest rate environment so exchanges are also looking to new products for revenue opportunities”.

“There is a lot of interest in swap futures as many people believe that product will come to market and be successful. The bigger challenge for all new products is how to make them successful post launch and build liquidity.”