Money costs prompt a battle of the futures

Do the Financiers of New York have a better feel for the direction of interest rates and the US dollar than the commodities dealers of Chicago? Once the New York Financial Futures Exchange (NYFFE), an offshoot of the New York Stock Exchange, opens early this summer and begins to compete with Chicago's Mercantile Exchange, traders in interest-rate futures and foreign-currency futures will begin to find out. For the two exchanges will be meeting head-to-head in what is sure to be a lively competition for the burgeoning futures business.

Already the Chicago exchange is beginning to take some shots at New York.

In a nearly full page and in the New York Times, the Chicago exchange trumpeted "Competition. It's what we face every day on our trading floor. Now we're getting some from outside. We can't wait."

However, they will have to wait. The New York Exchange's debut has been slowed because of the Nelson Bunker Hunt silver bust. According to sources in both New York and Chicago, the Commodities Futures Trading Commission (CFTC) has postponed its decision on whether or not to allow NYFFE (pronounced knife) to begin trading. Now, the CFTC will take up the foreign-currency contracts at the end of May and will not get to the interest-rate future until June at the earliest, a source at the CFTC says.

Although CFTC officials deny that the Hunt case has affected its normal business, one 10-year veteran in Chicago disagrees, noting the Hunt case "has put more pressure on the CFTC. The staff had to start writing papers for the commissioners on margin, squeezes, silver, and other things."

NYFFE officials says they are not worried about the delay. "If we don't begin in May, we'll start in June," says John Phelan, the chairman of the exchange.

When the exchange does open, it will be basically a carbon copy of the Chicago exchanges. There, trading is done in Treasury bills, Treasury bonds (on the Chicago Board of Trade), "Ginnie Mae" (Government National Mortgage Association), or mortgage- backed government securities as well as five basic currencies. In future trading on these exchanges, buyers of contracts are speculating on the future direction of either interest rates or currencies. Thus, if an individual expected interest rates to go down, he or she would purchase a contract to buy Treasury bills for delivery at a future date, locking in the current interest rate.

These markets are particularly helpful to financial institutions who normally would have large inventories of government securities. In this way, they are able to utilize the exchange to hedge against losses in their inventories due to normal fluctuations.

For Example, if Merrill Lynch & Co. held $1 billion in government securities in its inventory to sell to customers, it could sell $1 billion in contracts on the exchanges. Thus, if interest rates were to rise, and the value of the securities were to decline, Merrill Lynch would be protected from a loss.

Because the financial futures exchanges help protect institutions from such losses, there has been an interest in them all over the world. The Toronto Stock Exchange is considering beginning such a move and the London Stock Exchange has established a committee to explore opening such an exchange. Only a few weeks ago a financial futures exchange opened in Sydney, Australia. "The pattern is emerging," says Alexander McCullam, vice- president for public affairs at the International Monetary Market (IMM), part of the Chicago Merc.

However, opening a financial futures exchange does not necessarily mean overnight success. Officials at the American Stock Exchange's Commodity Exchange (ACE) have learned that, since there has been little interest in the Amex unit. In fact, ACE is in the process of negotiating a merger with the NYSE unit.

Mr. Phelan, of the NYFFE, says his unit will succeed where the Amex failed because "we're going to put a lot more effort into it." Currently, the NYSE is making a study of ACE's problems. "It's a study, not a postmortem," he stresses.

The NYFFE is also putting out a considerable amount of money to ensure that it educates both its members and the investing public. Some $1.5 million is budgeted this year for education. The exhange also is capitalized at $22 million. So far some members have joined, including a number of Chicago-based firms. However, an IMM spokesman says they have bought seats in New York mainly as investments. Several banks, including Republic National bank, Llyod's Bank International, the French bank CIC, and at least two Chicago banks have joined the New York Exchange.