What it means
LIFFE was set up in London in 1982 to give banks, companies and investors a regulated place to trade derivatives, which are contracts whose value depends on an underlying asset or rate. Its contracts let users manage risks such as changes in interest rates or share prices, and let traders take views on where markets were heading.
In its early decades, trading took place in an open outcry pit, where traders shouted and used hand signals to agree deals. Over time the exchange moved to an electronic platform, which allowed participants anywhere in the world to trade, and the trading floor eventually closed.
Among its best-known products were short-term interest rate futures, which let borrowers and lenders lock in rates for future periods. These contracts were widely used to hedge exposure to floating-rate loans and to price swaps, so they sit close to the history of benchmark rates such as LIBOR.
Exchange trading works through a clearing house (an organisation that stands between buyer and seller and guarantees that trades are completed). Participants post margin, which is a deposit that covers possible losses, and gains and losses are settled daily.
LIFFE was acquired by Euronext in 2002 and later became part of larger exchange groups, and its futures and options business was restructured several times. The brand name faded, but many of its contract designs and market practices live on in modern derivatives exchanges.
For a non-finance professional, the term often appears in older articles, textbooks and contract documents. Knowing what LIFFE was helps decode references to LIFFE-listed contracts, which may now trade under a different exchange name.
In practice
Real-world examples.
Example
A corporate treasurer expects to borrow $5,000,000 in three months and fears rates will rise. She sells interest rate futures on an exchange such as LIFFE, so that a rise in rates produces a gain on the futures that offsets higher borrowing costs. The hedge costs her margin and fees but fixes her expected cost.
Example
A proprietary trader in the 1990s stands in the open outcry pit and buys 200 contracts after a central bank announcement. His firm posts margin with the clearing house, and his account is credited or debited at the end of each day. He closes his position the next morning.
Example
An academic reading a 1990s paper on interest rate futures finds that its data comes from LIFFE. She checks which contract the data refers to and finds that it now trades on a successor exchange, so she matches the old and new contract names.
Formula
Calculation
Value of a tick = Contract size x Tick size x Period fraction
Suppose a hypothetical short-term interest rate future has a $1,000,000 contract size and is quoted as 100 minus the rate, so a tick of 0.01 equals one basis point (0.01%). For a three-month contract, the value of one tick is 1,000,000 x 0.0001 x (90 / 360) = $25. If the price moves from 97.50 to 97.40, the market has moved 10 ticks, so a trader who is long the contract loses 10 x 25 = $250 per contract, and a trader who is short gains $250. The calculation shows why traders think in ticks. A small move in the quoted price translates into a known cash amount per contract, so risk can be measured precisely before a trade is placed.Case study
Seen in the real world.
Thornbury Textiles is an illustrative, fictional exporter that borrows $12,000,000 at a floating rate. Its finance director worries that rates will rise by 1% over the next year, which would add $120,000 to annual interest costs (1% of $12,000,000).
She sells interest rate futures on an exchange of the LIFFE type, and when rates do rise the futures show a gain that offsets most of the higher interest. The company pays margin and fees and gives up the benefit if rates had fallen. The story is invented, but it shows how exchange-traded futures work as a hedge.
The finance director later reviewed the hedge with her board. She showed that the futures gain and the extra interest paid on the loan were within a few thousand dollars of each other, and that the margin she had posted was returned when the contracts were closed.
Watch out
Common mistakes.
- Assuming LIFFE still exists as a separate exchange. It was absorbed into larger groups and its brand has largely disappeared.
- Thinking exchange trading removes all risk. Prices still move, and margin calls can require cash at short notice.
- Treating older LIFFE data as identical to modern contracts. Contract sizes, trading hours and rules have changed over time.
Questions
People also ask.
When was LIFFE founded?
It began trading in 1982 in London.
What did LIFFE trade?
Futures and options on interest rates, currencies, equity indices and commodities, among other products.
Why did the open outcry pit close?
Electronic trading proved faster and cheaper, and it let more participants take part from anywhere.
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