The CBOT, Prebon and Liberty unveil a better way to trade cash governments versus futures. And that's only for starters.

Derivatives traders who want to trade cash government bonds against futures have always had to take collateral hits on both sides of the transaction. They also had to worry about burning up credit lines to their counterparties. Those days may be over, if a new plan announced by three financial powerhouses comes to fruition.

Last month the Chicago Board of Trade, Liberty Brokerage Investment Corp. and Prebon Yamane announced plans to set up an electronic platform to trade U.S. government cash bonds in conjunction with other types of derivatives. Although the new facility has the potential to revolutionize derivatives trading worldwide by forging a historic bridge for the cash, futures and OTC derivatives markets, it has received scant attention in the financial press.

Here's how the alliance will work: The CBOT plans to open its new Chicago Board Brokerage (CBB) electronic trading system in mid-1997, trading U.S. Treasuries, overnight dollar rolls/repurchase agreements (repos) and basis trades (cash U.S. governments against futures). The CBOT will own 51 percent of the new facility, and Liberty and Prebon Yamane, through a joint venture called Hudson Holdings, will own the other 49 percent. Liberty, an expert in the technology of money markets, is developing and will support the technology required for the electronic trading system. Prebon Yamane brings its marketing expertise and international network of OTC customers.

Clearing, settlement and cross-margining of trades will be available through a new subsidiary of the Board of Trade Clearing Corp. (BOTCC). The Clearing Corp. for Options and Securities (CCOS) will minimize counterparty risk by guaranteeing each transaction. Both CBB and CCOS have received clearance to operate from the Securities and Exchange Commission, which regulates the effort.

Traders who have access to a computer terminal will be able to get live quotes on cash, futures and OTC transactions from the screen or by direct voice connection with Prebon or Liberty brokers. All trades will be booked through the screen and entered into a central database.

The aim of the enterprise, according to CBOT President Pat Arbor, is to make the global financial markets broader and more liquid. "The new CBB system sends a clear message to all market users that we want to make these markets more efficient and transparent by giving our members direct access to cash U.S. government and OTC markets."

The proposal helps the CBOT confront one of its critical weaknesses-its concentration on U.S. dollar products prevents it from serving sophisticated U.S. derivatives players who must now go to Europe and Asia to trade nondollar contracts. It doesn't take a rocket scientist to see that the growth in nondollar business could hurt the CBOT if it doesn't find a way to bring trades from the U.S. players back home. Electronic trading, combined with a clearinghouse/ cross-margining system, may be just the right lures. Although CBOT officials aren't eager to discuss future expansion plans, the system could conceivably be expanded to allow traders to trade cash bonds against futures in other countries.

Of the declared rivals, the CBOT's Chicago neighbor, the Chicago Mercantile Exchange, will feel the pressure most keenly. The proposal, in fact, may be a response to the CME's efforts to prohibit the trading of Treasury/Eurodollar spread contracts. In making the announcement, however, Arbor denied that this was a catalyst for the group's efforts, saying that the trio began talking two years before the Merc rule change. Although it will not be possible to use the new system to trade TED spreads, Arbor doesn't rule it out as a possibility once other features are added.

The new venture is also a clear nod to the successful electronic foreign exchange services offered by the Reuters 2000 system and Electronic Brokers System (EBS), and the innovations in forex clearinghouses. All have the potential to threaten the CBOT's interest-rate derivatives franchise.

A Future For Futures?

Some people in the futures brokerage business seem to be sinking into a deep funk.

As support of their malaise, they point to several disturbing pieces of evidence: Last year's steep staff cutbacks at Lehman, Salomon, Phibro and Merrill Lynch sent a chill through the industry; Citibank is on the verge of selling its futures brokerage; a number of Japanese banks have quit the business; and the number of U.S. investment firms that trade futures on behalf of clients fell to 240 in 1995, versus 498 a decade ago.

Nonsense, says Taylor Hurst, managing director at BA Futures, Bank of America's Futures subsidiary. He thinks the rumors of the industry's death are greatly exaggerated. "In this business every time anyone-a bank or non-bank-gets out, one or two get in." Deutsche Morgan Grenfell, Union Bank of Switzerland and Banque National de Paris are recent newcomers, and Dresdner is reportedly ready to jump in. "In any business like this there is always some fallout as a result of changes of direction," says Hurst. Though BofA's futures unit has only a modest market share right now, it is sticking to its plan to grow the business slowly. Last month, in fact, it set up clearing facilities in Spain.

Hurst also points to big new investments made by Fimat Futures, which last year had a 33 percent increase in futures and options contracts cleared. Much of this gain was in overseas markets, which are expanding while the U.S. exchanges have slipped. Another believer in the future of futures is Itochu, the largest of the giant Japanese trading behemoths, or sogo soshas, which formed a new futures unit a couple of months ago.

It was four days before Christmas, Michael Schwartz reflected, as he penned his plea to Paul Steiger, the managing editor of the Wall Street Journal, so maybe Santa would give him a break. He begged Steiger to reverse his paper's decision to reduce the size of its daily options tables from a page to half a page.

Schwartz, who is chairman of COOP, the seven-year-old Committee on Options Proposals, pointed to the "spectacular growth in contract volume" of recent years, with 2150 underlying stocks involved versus 16 two decades ago. What's more, Schwartz enthused, this was a year of all-time record volumes and "an unprecedented level of awareness among individual investors" who depend on the newspaper for pricing information.

Two days later the paper went through with its plan. "The Grinch that stole Christmas for options investors," sniffs Schwartz, disappointed that the paper was not responsive to his compromise plan to list-in the first three months of an option rather than all five months.

Some years ago Schwartz faced the same situation when Barron's nixed its options coverage for the same reason-to cut back on newsprint costs. "I even had some big advertisers write to them, but we did not prevail," he sighs. "It seems that regardless of the amount of business we do-be it options or derivatives-to them newsprint is more important than readership."

A small consolation: volume, closing prices and open interest data on all options contracts that trade can be found daily at http\\wsj.com.