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Nymex Plans Global Electronic Exchange, For-Profit Status

Nymex Plans Global Electronic Exchange, For-Profit Status

The New York Mercantile Exchange took two giant steps forward last week, announcing plans to become a for-profit organization and to launch a global electronic exchange for over-the-counter forward trading and clearing of a wide range of standardized physical commodity contracts.

The exchange plans to launch the first phase of the e-commerce exchange in October. It will use its existing clearing infrastructure to introduce complete counter-party risk management for OTC trading, and will create net margining with futures markets by calculating a consolidated clearing position.

The new eNYMEX venture will provide a single, Internet-based interface to both the OTC markets and the futures market by routing futures orders to the trading floor and the Nymex ACCESS electronic trading system, depending on the session.

The range of OTC products offered initially would focus on swap contracts in crude oil, petroleum products, natural gas, and electricity, with some spot cash market products also offered, Nymex said. Over time, this would be expanded to include precious and base metals, coal, and, potentially, bandwidth, weather and emissions. Although the initial geographic focus will be on North America, contracts also may be offered for some European and Asian locations.

"The global energy and metals community has expressed a strong need for an electronic OTC platform that provides an open, independent, and neutral marketplace for trading by all participants, price transparency, counter-party credit risk management, and the liquidity created by simple standardized contracts," said Nymex Chairman Daniel Rappaport.

Nymex plans to launch OTC trading first, followed by Internet-based order routing for futures trading. It also is actively looking for joint venture partners. "We're sifting through the many offers we have on the table right now," said a Nymex spokeswoman.

There have been numerous announcements over just the last few months of energy companies and others launching or taking equity positions in new energy e-commerce sites. According to a report issued by Global Change Associates in April at least 30 electronic trading platforms have been announced since December.

The following are just a few of the recent announcements about energy e-commerce:

  • In March, seven U.S. and European financial institutions and diversified energy and natural resource firms said they would launch IntercontinentalExchange. The partners are BP Amoco, Deutsche Bank, Goldman Sachs, Morgan Stanley Dean Witter, Royal Dutch/Shell Group, Societe Generale, and the Totalfina Elf Group. Based in Atlanta, the venture intends to begin trading in a variety of petroleum and precious metals-based OTC products later this year with plans to later develop additional markets for other commodity products, including global natural gas, electrical power and a variety of base metals. IntercontinentalExchange officials would not say when electricity or gas trading might begin (see NGI, March 27).
  • In April, Southern Company was one of 15 US electric and gas companies banding together to launch an Internet marketplace for the energy industry and its suppliers. Other partners include American Electric Power, Cinergy, Consolidated Edison Inc., Duke Energy, Edison International, Entergy, FirstEnergy Corp., FPL Group, PG&E Corp., Public Service Enterprise Group, Reliant Energy, Sempra Energy, TXU and Unicom (see NGI, April 17).
  • Late last month, Dynegy and Williams teamed up to invest $25 million each for a minority equity stake in eSpeed Inc., an interactive electronic marketplace engine for business-to-business (B2B) e-commerce (see NGI, May 1).
  • In March, Williams Energy Marketing and Trading made an investment in trading site HoustonStreet.com, which was launched in July 1999. Equiva, the joint crude oil trading arm of Saudi Aramco, Shell Oil and Texaco, invested $6 million in HoustonStreet earlier this year. The exchange has attracted a large number of power companies. Although it would not release the daily volumes traded on its physical trading platform, called PowerPit, or the number of transactions that take place, CEO Frank Getman said there are 125 companies registered to use the web site with close to 500 traders (see NGI, March 13).
  • Altra Energy Technologies Inc. made a strategic alliance with three major market makers --- American Electric Power (AEP), BP Amoco and Koch Industries --- to increase liquidity and strengthen its position as an independent online energy trading exchange. Altra's electronic trading system for natural gas, liquids and power has grown from 17 employees in 1995 to 300 today with 1,800 daily traders. The company did $1.65 billion in 11,000 transactions during February.
  • RedMeteor.com announced a global, Internet-based, open trading platform for crude oil, gas, gas liquids and electricity. Backed by $15 million in venture capital from Mayfield Fund and Fremont Ventures, the new website will allow, beginning this spring, instantaneous multiple energy trades worldwide (see NGI, April 3).
  • Coral Energy's e-business web site, Coralconnect.com, is expanding to include the buying and selling of certain gas contracts. Site users now can make term gas deals with Coral, whereas before they could only alter existing contracts. Besides the term deals, Coralconnect.com now offers Nymex and basis transactions (see NGI, April 3).
  • EnronOnline, which started operations Nov. 29, 1999 with gas trading, is reporting a notional value for current trading of $600 million a day. The company recently added bandwidth capacity to its list of trading commodities, which includes power, natural gas, coal, weather products, petrochemicals, pulp and paper, and emissions credits in the Americas, Europe and Asia.
  • PowerSpring announced plans for eMarketplace, which would combine an online exchange, aggregated customer demand and a portal with energy-related information (see NGI, April 3).

The big questions for Nymex are: how will its new system fare against the heavy competition that's already out there, and why should the industry put its faith and its money into another new e-commerce site when Nymex's last electronic trading venture failed.

According to exchange Executive Vice President Neal Wolkoff, there are many factors that will separate eNYMEX from the crowd. "Nymex can tie together an existing liquid market and an existing customer base, use our experience, use the people and the intellectual capital that we've developed over the years in this area and bring the benefits of that into e-commerce on the OTC side," he said. "There are economic benefits, there's clearing, there's bookkeeping, there's non-clearing risk management and there's a level of market knowledge and market management that we would anticipate bringing, and that others frankly don't have."

Wolkoff predicts that it won't take long for the many energy e-commerce sites to consolidate. "It's unfortunate to be talking about consolidation prelaunch of so many systems, but it seems inevitable and not just in energy [e-commerce]," he added. "The same things are happening in so many other industries. There's just not going to be room for 15 sites. My guess would be over the next two years, perhaps three," consolidation will begin in earnest.

Many observers might question Nymex's chances given the launch and subsequent shelving of its previous energy electronic trading system, Channel 4. But Wolkoff noted e-commerce has come a long way in the last few years. "Channel 4 predated a lot of the interest that companies were having in the use of electronic systems to get efficiencies, transparencies and cost reductions on their transactions," he said. "I also want to say that Channel 4 --- although we had some fairly clever credit protections --- didn't offer the full range of risk management tools that we are planning to have as part of this [eNYMEX product]."

The new system will be more comprehensive, he said. It will tie the business done on the new e-commerce system with the business done on the regulated futures and options markets. "Companies that have a portfolio of gas positions, some on Nymex and some on the e-commerce platform, to the extent they are offsetting, we would take into account the entire risk in determining the margin requirements on the regulated positions," said Wolkoff. "So there are cost savings that we're talking about here that weren't possible because of the regulatory world when the Channel 4 system was done.

"And we also try to learn," he added. "We have launched Nymex Access for example, which does trade. It's been an electronic trading system online for seven years. It doesn't do the kind of volumes we do during the day but it does significant volumes. It's been a productive system."

Regarding the potential for margins for OTC trading on the new system, Wolkoff said Nymex is not interested in changing the cost structure of the OTC market. It would "rather allow some of the benefits from having OTC positions [to carry over into] the futures market. We'll come up with whatever the appropriate mechanisms, risk protections there are. We're certainly very mindful about keeping costs as low as possible. I'm looking at this more as a means of providing benefits because we have the half of the equation that nobody else does, namely futures and options," he said.

The exchange board has retained the services of Andersen Consulting, L.L.P., to work further on the venture. eNYMEX is expected to be a wholly owned, for-profit subsidiary of the New York Mercantile Exchange.

For-Profit Vote Scheduled for June

The subject of the other major announcement by Nymex last week was its plan to hold a membership vote June 20 on a "demutualization" plan, which would convert the exchange from a not-for-profit membership structure to a for-profit organization under Delaware law, pending approval of the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Internal Revenue Service. Each Nymex Division membership would be converted into one share of common stock in a new holding company for the entire organization.

"Restructuring the exchange into a for-profit entity will provide us with the opportunity to create new business ventures, react rapidly and decisively in an increasingly competitive marketplace, and explore interest by outside investors" said Rappaport.

Wolkoff also said there actually is a "very close tie" between launching the new e-commerce site and becoming a for-profit entity. "The members of the exchange right now typically earn their livelihood through trading and brokerage opportunities. The fact that there has been a wonderful equity appreciation in the exchange is a very big benefit, but it's not the way in which people receive the benefits of membership. When you enter into these alternative businesses, which do leverage your existing business knowledge, your existing business assets, it's not so much that the members or the owners of the institution will be receiving trading and brokerage benefits, but we want them to be able to receive the benefits of the exchange through transaction revenue and other normal for-profit activities. The exchange will enter into for-profit mode and will be able to have its equity realized through appreciation from these successful business ventures."

In addition to Nymex, several other exchanges in Chicago and New York are for the first time attempting to become for-profit entities. The reasons, according to Wolkoff, are technological and regulatory changes and new business opportunities. "I think the technology has made it such that customers are looking to the exchange model in getting different parts of their business functions made transparent and made competitive. And the exchanges are really in a very good position given their expertise and their history to be able to fulfill a lot of these needs.

"I think the fact that the regulators have been more willing to allow the exchanges to offer a more complete slate of instruments for customers, both that are traditional regulated instruments plus nontraditional, nonregulated instruments also is helping to drive this," he added. "And I think that the exchanges, with the whole advent of technology and Internet businesses, realize that given their assets they have business opportunities here.

"We look on it as an expansion of our business with nothing negative or bad about it. This is definitely a plus for the customer community."

Rocco Canonica

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