Germany’s capital markets hub has often
yearned to steal London’s crown as
Europe’s financial capital. For all the marketing
efforts of Finanzplatz Deutschland, and the advent of the euro,
Frankfurt has never seemed to get much closer to its goal.
Listed derivatives is the one market where it has succeeded
– at least on paper. In 1999 Eurex sc
reamed past Liffe on the outside lane to
become Europe’s biggest futures and options market
by contracts traded. Its notional volume is now more than twice
as big, although translating that into real cash terms is
Yet Frankfurt still doesn’t feel like the
centre of gravity of European derivatives. Perhaps partly
because of Eurex’s success in electronic systems,
many firms that trade its contracts are based elsewhere.
Participants in Frankfurt still look to London as a bigger
Perhaps it doesn’t matter. If numbers are what
counts, Frankfurt has the larger market. If it’s
the people and culture of a place, then Frankfurt has something
valuable too – a different model, something unique to
Frankfurt’s history as a financial centre is
longer than Germany’s as a nation state. The first
exchange was founded there in 1585 and it became the base for
the banks that service the industries of what was until 2009
the world’s largest exporter.
"If you define a financial centre by the size of its
stockmarket, then no one [in continental Europe]’s
going to take that away from Frankfurt," says Chris Charlton
(pictured), a former FX market player and now owner of Centa
Asset Management, a Frankfurt-based firm that specialises in
currency investing. "Historically, it was always
Germany’s financial centre, even before the
But things are changing. Last year’s final,
inevitable, transfer of the title of world’s
largest manufacturer to China underlined the impact of the
financial crisis on the Bundesrepublik, whose economy shrank by
more than 5% in 2009.
But is that merely a temporary knockback caused by the
crisis, or part of a slower-burning process of decline? And
what opportunities and challenges does it pose for the
country’s derivatives markets?
"We continue to have this gradual shift from a manufacturing
society to a services society," says Lutz Raettig, chairman of
Morgan Stanley Bank AG’s supervisory board and a
veteran of both the German and North American banking scenes.
"It’s keeping us alive, at least... Companies are
opening up from the traditional model of family ownership."
"It’s an exciting time for investors, compared
to 20 or 30 years ago, when everything was bank-financed,"
agrees his colleague Oliver Wagner, an executive director in
global capital markets. "Companies are now more focused on the
capital markets for funding – guys who have never
issued bonds before."
Jon Walton, a managing director in the same group at Morgan
Stanley in Frankfurt, suggests the crisis may provoke German
companies to make more use of derivatives for risk management,
now that bank funding is less reliable. "A lot of it depends on
their risk management [priorities]," he says. "People may
choose to manage risk in that way."
Bankers and brokers
The corporate approach to risk management is changing,
agrees one broker. "Where once you had that relationship with a
bank, now you have to find a broker. It’s alright,
once they get used to the idea!" he laughs.
You can sense a mild resentment in his voice – a
common thread among many of Frankfurt’s
derivatives specialists, on both the buy and sell sides.
The regional CEO of one brokerage has a theory. "The broker
business in Paris is much bigger than here," he says.
"It’s a cultural thing. It’s not
considered a smart thing to be a broker [in Germany].
Makler is a versatile term here; usually, the Germans
use it to mean 'someone who I have to pay to do
The executive goes on to point out that, in contrast with
Paris, where maths and economics bulk large in higher
education, the most prestigious academic backgrounds in
Frankfurt are law and theology. "The most famous universities
are from this tradition," he points out. "The most noble
professions, in spite of Germany’s manufacturing
background, are law and theology."
Still, the country’s strong academic drive has
created a pool of business talent for the rest of the economy,
argues Wagner – even if it isn’t
particularly geared towards the needs of brokerages. "It is
huge," he says. "But of course, it’s the depth of
the economy. We are one of the few financial centres that are
fully entwined with the domestic economy. We have a very good
Eurex feels the pain – and takes
Eurex’s woes have been plain for all to
see over the past 12 months. Still absorbing the cost
of its $2.8bn acquisition of International Securities
Exchange in 2007, the bourse suffered a loss of
€367.7m last year, before interest and tax,
largely owing to a writedown of €415.6m on its
investment in the US options exchange.
Parent company Deutsche Börse has instigated a
widespread programme of cuts, hoping ultimately to save
some €200m a year.
Morgan Stanley’s Lutz Raettig, who is
also head of the exchange council at Deutsche
Börse’s subsidiary, FWB Frankfurter
Wertpapierbörse (the Frankfurt Stock Exchange),
says Eurex remains well positioned for the long
"I think they are competitive. And I think they will
continue to be," he declares. "Most of their major
payers will stay on board. There’s always
a threat [from MTFs]", he adds warily, "but I
don’t think I’m suddenly
going to find myself sitting here without a shirt
"They’re in a good position, no
immediate danger," agrees another broker. "I
don’t think there’s any hope
for the MTFs in derivatives – not in the near
Others see the restructuring as a blessing in
disguise. "In Germany, you have always the factor of
staff costs," says one senior market player. "This is
why outsourcing is so attractive to companies like
Eurex. But Eurex is still performing very well," he
And perhaps even the bourse’s
restructuring plans will not prove too much of a
roadblock to expansion in the long term.
"I’m pretty sure Deutsche Börse is
looking at other markets," says one senior market
player. "For sure, they will go for a stake in the
Warsaw Stock Exchange."
"Eurex is not a pure domestic market," agrees
another. "Their expansion is not focussed on Germany.
They don’t focus on the local market; they
focus on the products they can sell."
"Academia is very geared towards business here," chimes in
Raettig, a strong supporter of the German MBA system. "We have
more universities than any financial centre."
A quick drive through Frankfurt’s outskirts
confirms this. Imposing post-war, new-build institutions of
learning bear down on the visitor from all sides, blending
seamlessly with their industrial surroundings, and churning out
business minds with something like the same vigour.
Raettig’s words, however, highlight another
issue that has had a bearing on Frankfurt’s
position amid other global financial centres.
There is not merely a cultural split in
Germany’s business population – an uneasy
divide between the financial markets and industrial companies
– but this elite is also spread thinly across 16
states. Even Germany’s stock exchanges are
scattered over eight regions (though for how much longer,
post-crisis, remains to be seen).
As Matthias Löffler, a managing director in the
Frankfurt office of systems group SunGard, puts it: "Frankfurt
is not the country’s only financial centre
– the buy side and sell side are spread over the
country. I have much higher travel expenses here, because I
have to visit Munich, Berlin, Stuttgart, Düsseldorf and
Charlton is blunter. "Frankfurt is regional.
It’s got clout, but if you’re talking
about asset management, you could even say Switzerland [is
bigger]. Take Deutsche [Bank]’s head office for
instance: is it here, is it in London? In the
’80s, Frankfurt had a serious go at replacing
London as Europe’s leading financial centre, but
the Big Bang in London blew Frankfurt away."
"Frankfurt is very specialised, and a domestic market
still," agrees Wolfgang Fabisch, CEO of b-next, which
specialises in regulatory compliance software. "People
don’t like to acknowledge that, but it is... I
think the banks are still gearing towards New York and
Shanghai... our own companies are doing more and more business
with London and New York."
This appears to be borne out by sheer numbers. "We have 350
people here; in London, we have 4,500," says Raettig.
"We’ve got a pretty big stable here [but] the main
office is in London."
Still, Frankfurt has quite some clout. "If you divide the
international recognition by the number of people who live
here, it’s quite incredible," says Walton at
Greater Frankfurt’s population stands at 2.3m
according to Demographia, which estimates London’s
"It’s a small city, and extremely convenient,"
says Justin Wilson (pictured), who spent several years helping
develop Goldman Sachs’s technology in its German
subsidiary during the mid-1990s, and now runs Alpheus
Solutions, an independent consultancy. "At FOW’s
Frankfurt conferences, you’d bump into the same
people you saw 10 years ago. That would never happen in
Yet demographically, Walton
suggests, Frankfurt has more in common with London than with
other, larger German cities. "If you look at
Frankfurt’s population, about 30% is foreign-born
and raised abroad. Also a huge number of Germans here have
lived abroad – far more than in Munich, for
Is prudence a virtue?
But what you can do in London, it would seem, you
can’t do in Frankfurt. "I still think in Germany,
we don’t have the derivatives trading culture like
in London," says Löffler at SunGard. "The two big centres
for derivatives in Europe, I would say, are London and
Amsterdam. Our order flows are mostly generated in Great
Britain or routed from Frankfurt to London."
There is a huge equity bias, he says. "Sixty to seventy
percent of the trading here is in equity."
"The UK is much more of a gambling culture," says Charlton.
"Take horse racing. You have four meetings a day; here,
it’s more like one a month."
Charlton ought to know, as Centa’s offices back
onto the city’s Renn-Verein Frankfurt am Main
racetrack and neighbouring golf course – another firm
favourite among the city’s expats.
He would not be the first to imply that you need to be a bit
of a punter to like derivatives.
"The investment mentality isn’t the same here
as it is in London, Italy or even Poland," Löffler
believes. "There is perhaps a conservatism... People
aren’t quite sure what to do with their money
— that is why gold is going up and up. That
uncertainty only fuels consternation." German retail investors
do not, in general, hold derivatives products in their
investment portfolios, Löffler says. "[But] in Germany, we
have a very strong market for warrants –
that’s not to be underestimated. This is the
strongest retail asset class for
If the retail market is small now, it is an awful lot bigger
than it was even a decade ago, argues Thomas Pirzer (pictured),
a former UBS derivatives trader and now Wilson’s
colleague at Alpheus. "There was a very aggressive move to
incorporate [retail investors into] derivatives trading
strategies 15 years ago – a real targeting of high net
worth individuals," he says.
These trends are intimately linked, Charlton suggests, to a
vastly different attitude to ownership and credit in Germany.
"The housing market here hasn’t moved for 20
years. That’s one reason the crisis
didn’t hit so hard here in France and Germany. The
housing bubble never burst because it never went up in the
first place. It’s a completely different style of
living; here it’s save and export, in the UK
it’s borrow and spend," – right down to
government, Charlton contends. "People wait until
they’re in their eighties to buy a house. Even
credit cards only became widespread five years ago. The whole
idea of property is different."
His view is shared drily by the city’s
property-owning classes. "My house, after 20 years of ownership
and huge renovation in that time, is still worth less than it
was when I bought it!" laughs Pirzer with hardened humour.
Crisis shakes things up
But if the crisis has meant little to the
country’s housing market, it has rocked the
banking community – including the derivative
"There has been less proprietary trading activity in
general," says one senior industry figure. "Not much has been
said officially on this, but we know two or three banks have
closed their prop trading divisions. Prop shops are under
creation, but [the market] is still small. We
don’t have that remote trading culture here, not
like Italy or other countries."
But one favourable aspect of the crisis is a broadening of
the investment horizon, counters one senior market commentator.
"I see trends changing. It’s quite likely
we’ll have a sideways movement [in equities]. The
majority of our clients now are looking at derivatives.
There’s a real push for single
"Someone’s got to
"You’d have thought the Germans would
have been crowing over the failure of the Anglo-Saxon
model, but that’s not the way here," says
Justin Wilson, CEO of London- and Frankfurt-based
consultancy Alpheus Solutions.
Although, as Wilson points out, some German
institutions were as overexposed during the crisis as
their UK counterparts – in spite of a national
attitude of prudence.
"Sal. Oppenheim really tarnished the reputation of
private banking here," says Wilson. "If it
weren’t for them, Germany would be able to
say: 'look how prudent we are.’"
The 200 year old private bank, a prominent
derivatives market maker, had to sell itself to
Deutsche Bank after being crippled by losses in 2008.
Former managers are now being investigated.
Has the financial crisis tarnished
Frankfurt’s reputation to the same extent
"There’s been a whiplash effect here
– against Landesbanks in particular," says
Chris Charlton, head of Centa Asset Management.
The highest profile crisis victims in Germany have
been partly state-owned banks – first IKB
Deutsche Industriebank, but then the
country’s Landesbanken, a network of
regional wholesale banks, designed to finance the
economy of each Land.
Many got into trouble with triple-A rated structured
credit investments that turned sour, and were bailed
out by a specially created government fund.
"The Landesbanks are undergoing serious
restructuring," says Lutz Raettig, chairman of Morgan
Stanley’s German supervisory board. "Will
they [emerge] in one bit, in two or three –
who knows? [WestLB] have farmed out their bad bank, but
this will have consequences, of course."
Matthias Löffler, managing director at SunGard
in Frankfurt, is also concerned.
"The impact of the crisis on Germany was
underestimated. We're all watching the actions of the
state very closely; at some stage, I think we will see
further consolidation for example the Landesbanks
either coming together or being bought out."
The current state elections are not a shoo-in for
the ruling Christian Democrat Union, Charlton says.
"Greece has been a political issue; Merkel
can’t be seen to be bailing them out. But
there’s no question that
they’ll do it... just not publicly."
Wilson agrees: "I think Merkel’s
playing a very clever game. It’s in her
interests for the euro to be lower. Just look at
[Germany’s] exports to China and India in
the past quarter."
The local taxi drivers are more than happy to offer
their opinion on the subject, too – often
without prompting. Asking one what he makes of the CDU
earns a noncommittal shrug. "They’re OK,"
he says. "But in Germany, we just say the trough
remains the same – only the animals
Eurex (see box) certainly appears keen to capitalise on this
apparent demand. Since the beginning of 2009, it has launched
trading in more than 100 new futures on individual stocks from
several countries. April 2010 was a record month for single
stock futures at the exchange, with 51.6m contracts traded.
Loeffler believes the buy side is becoming professionalised
since the crisis, partly because many firms suffered from the
The turmoil has also shaken up the scene, causing people to
move around. "Many former bankers are joining us now," says an
insider at one of the country’s biggest
"I think those guys who have been fired by the banks are
young guys, smart guys," adds another market player. "Smaller
companies will now have opportunities in the proprietary
"Frankfurt is still very active, especially in the
exchange-traded [market]," insists Fabisch at b-next. "Deutsche
Bank, Commerzbank and Dresdner are very active... the
derivative market is still growing here. We have many new
product requests from customers, even now."
Growth on every front
"For the time being, the growth areas look to be commodities
and fixed income," says one broker. "Fifty percent of the
warrants issued last month were in commodities. The end market
is huge. The car industry is immense, so naturally base metals
are huge... agribusiness is smaller [but] 50% of this country
is fields of wheat, lest we forget."
Charlton insists derivatives still have an important role to
play in resolving the crisis, even if innovation sometimes
seems a dirty word in Frankfurt financial circles. "CDS have
been abused, but they do work. They at least put pressure on
the governments to do something [about budget deficits]," he
Risk appetite, Charlton says with some surprise, is
resurgent too. "It’s coming back! People want more
risk. Well," he qualifies, "they want more return. People have
Equally, the expansion of the EU can be an important driver
of growth for Germany, Löffler insists, rather than simply
a cheap source of labour for its multinationals.
"We’re already getting order routing requests from
Hungary and Romania," one market participant agreed.
Wilson agrees, saying London’s position in EU
financial circles relative to Paris and Frankfurt is hampered
by the UK’s persistent Euroscepticism.
"Germany has a real opportunity now [to seize the
initiative]," Wilson says, but "the biggest barrier remains
this natural pessimism. For example, in the UK we always revise
up our growth figures; here, they revise them down."
Wilson mentions the Z/Yen Group’s annual Global
Financial Centres report, which assesses economic
competitiveness between the world’s capital market
hubs. London maintains its number one spot this year –
albeit now shared with New York – while Frankfurt lies
13th. But the gap between London and Frankfurt has closed by
some 43 points in just six months – the fastest move
since the survey began.
"Frankfurt is not going to be number one or two in the
world, or even number five," Wilson concludes, "but slow and
steady has done well for them in the past."
As the present crisis of government credit risk in the euro
zone has shown, it is fortunate for European stability that
Germany has ploughed its own, sometimes lonely course.
Frankfurt’s financial style is every bit as
important to the derivatives market. Long may it continue.