Can Deutsche Boerse Build a Better Mousetrap?

Having looked at the factors that led to CME Europe shutting its doors, eyes should turn to Deutsche Boerse, which listed FX derivatives contracts via Eurex around the same time as the CME Europe was launched. Over at Profit & Loss we've published a detailed analysis of Deutsche Boerse's strategy, but here are a couple of highlights.

The German exchange operator struggled to build liquidity on these contracts, leading to it "re-launching" them following the acquisition of 360T.

Why couldn't Deutsche Boerse build liquidity the first time round?

During an in-depth interview with Profit & Loss in September last year Carlo Koelzer, CEO of 360T Group and global head of FX at Deutsche Boerse Group, said the derivatives contracts weren't initially successful because there was "no FX DNA" within the group when they were launched - there was no franchise and no existing customer base. In addition, he noted that the contracts that were first launched on Eurex were too similar to other products already available in the market.

What does Deutsche Boerse think will be different this time round?

With the acquisition of 360T in 2015 Deutsche Boerse gained both FX expertise and an FX franchise with customers that could potentially be interested in using derivatives products. Koezler also says in the interview that the regulatory environment is making liquidity more fragmented along geopolitical lines, with European corporates and asset managers increasingly keen to avoid other regulatory jurisdictions.

Another reason why Deutsche Boerse seems to feel that Europe is ripe for FX derivatives products is that it claims contracting prime broker capacities and higher costs for bilateral credit, combined with a trend towards transparent and “stamped” execution, is leading to an increased interest from market participants in listed products.

But these factors didn't help CME Europe, which didn't lack for FX expertise or resources.

So how does Deutsche Boerse build a better mousetrap?

The re-launch of the derivatives contracts, as well as the upcoming launch of rolling spot futures on the Eurex exchange to offer a synthetic OTC FX spot equivalent, are part of Deutsche Boerse's broader "FX 2.0" strategy, which again is laid out in much more detail in the Koezler interview. This strategy focuses on becoming a venue that can enable firms to execute all the OTC and listed FX products that they might need in one place, while also providing any ancillary services that firms might need around the execution.

So it seems that consolidating everything that they think firms will need to trade FX in one place is how 360T/Deutsche Boerse Group plans to differentiate its offering to market participants.

Will it work? For now, it remains to be seen.