Competition from banks that offer derivatives contracts over the counter is beginning to cut into the trading volume of financial futures contracts at Chicago's commodities exchanges, industry sources say.

Although overall trading volume is up due to a weather-related boost to agricultural contracts, the exchanges are reporting sharp declines in most financial futures and options contracts.

The Chicago Mercantile Exchange reported that the total volume in interest rate futures and options traded in May was off 25% from May 1995, at 10.1 million contracts. Year-to-date volume was 14.2% lower than in 1995. Similar declines were posted in the exchange's many currency futures contracts.

Likewise, the Chicago Board of Trade reported a 12.1% decline from a year ago in May interest rate futures and options volume, to 14.6 million contracts. Year-to-date volume was off nearly 2.4%.

One industry source said the decline in volume may be the first indication of improved efficiency in the negotiated derivatives markets. "Short-term, I think competition from the OTC market is causing the decline."

Some interest rate contracts have continued to grow in popularity. At the Chicago the Board of Trade, volume in the 10-year treasury note contract declined 5% in May, but year-to-date volume is up 52.2%.

And at the Mercantile Exchange, strong gains were posted in certain currency contracts, in the Growth and Emerging Markets division, and in equity futures and options.

But it has been agricultural futures and options that have buoyed both markets in recent months. Year-to-date volume in this sector grew by 85.9%ok? at the Board of Trade, and by 23.3% at the Mercantile exchange.

Rising volume in agricultural products has helped the Board of Trade, which has a heavier reliance on agricultural contracts, post an overall 14.2% gain in year-to-date volume, to $100.2 million contracts.

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