GERMAN CAPITAL MARKET LIBERALIZATION STALLS
West Germany's capital market
liberalization program has stalled and bankers are worried it
may take years for further reforms to be completed.
    Liberalization got underway in May 1985 when foreign banks
received Bundesbank permission to lead-manage mark eurobonds.
    Further moves included introduction of mark-denominated
certificates of deposit last year. But other changes, including
revisions in the domestic options market and introduction of
futures contracts, need lengthy statutory changes and this may
take years, bankers and dealers say.
    Deutsche Bank AG co-chairman F. Wilhelm Christians called
last week for an enlargement of current capital market
instruments to include instruments already standard abroad.
    He said these are needed especially when prices fall,
citing declines in West German share prices in the first two
months of this year when stock indices fell about 20 pct.
    Others are more blunt. Securities dealers say the lack of
viable hedging instruments for shares and bonds makes trading
in domestic markets too risky.
    "We need a stock index futures contract, and a futures
contract for recent government bonds," one dealer said.
    West Germany now has options contracts on about five pct of
shares and bonds traded on exchanges here, covering only about
30 pct of the average traded volume, stock market sources said.
    Options can only be written on the original 14 bonds
selected when bond options were introduced last April. The most
recent bond on the list was issued in 1985.
    There are no futures exchanges in West Germany. German
banks may participate in futures exchanges through branches
abroad but these are at least outwardly subject to stringent
West German rules requiring that every contract be secured on a
one-by-one basis with a separate hedge, to prevent speculation.
    Another problem is a lack of liquidity in the existing
markets, owing to lack of private investor participation.
    Private individuals and corporations do not engage in
options trading now due to West Germany's civil and exchange
laws, which define losses made in futures and options business
as gambling losses, which investors need not pay back.
    Options business has been hurt by lack of liquidity from
pension funds, which currently are forbidden to invest in these
instruments. But they are to be allowed to enter the business
soon as the European Community begins to harmonize rules
governing funds.
    Manfred Laux, general secretary of the West German mutual
funds association in Frankfurt, said harmonized rules are to be
adopted by October 1, 1989 at the latest.
    The push to adopt new instruments has not been great in the
past, owing to wide-spread belief they are speculative, which
gives them a bad name in West Germany. But pressure for their
introduction here is growing.
    The start-up of a Swiss futures exchange has some bankers
considering if a similar exchange would be useful in West
Germany. They say that without innovations, some business could
drift to London, which the Bundesbank vehemently opposes.
    An official at the London International Financial Futures
Exchange (LIFFE) said the exchange currently has no plans to
introduce more mark-denominated contracts beyond the existing
mark-dollar contract. But he said the exchange is studying the
feasibility of other contracts, including one for three-month
mark interest rates and possibly a government bond contract.
    A Bundesbank capital markets expert said the Bundesbank has
no objections to hedging through futures but any liberalization
in that sector is still in the early planning stages after
earlier talks ended two years ago.
    Considerations about the futures business have been drawn
out because of the large number of participants involved in
talks. They include parliament, the Bundesbank, the Federal
Banking Supervisory Board, eight West German stock exchanges
and their governing states, and the four West German banking
associations.
    Beyond options and futures, other changes being suggested
include replacing the federal government's current bond
consortium with an auction procedure similar to one being
considered in the U.K. And already in practice in the U.S.
    This would upset the existing market order providing German
and foreign banks in the consortium with fixed quotas but it
would eliminate the misallocations some bankers say presently
arise within the fixed consortium quota system.
    In addition, some bankers would like the method of bond
trading on the West German stock exchange changed to a system
of continuous price-setting from the current system in which
every bond price is fixed once a day.
    This would make trading more transparent if it reduced the
proportion of off-floor interbank bond trading, now some 90 pct
of the volume of bond transactions here, the bankers say.
 REUTER
