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Prebon, Amerex, Bank of NY Form New OTC Clearinghouse

Prebon, Amerex, Bank of NY Form New OTC Clearinghouse

The Bank of New York, Prebon Yamane and Amerex announced a new concept for the energy industry that they believe will significantly boost market liquidity and efficiency. They have formed a new joint venture called EnergyClear, which will create the first industry-sponsored clearinghouse to offer comparison, netting and settlement of wholesale energy contracts for the over-the-counter (OTC) marketplace.

It is anticipated that EnergyClear initially will offer its services to participants in the wholesale power and natural gas markets as early as the spring of 2001. In the future, EnergyClear anticipates servicing contracts for other OTC commodities such as crude oil, petroleum products, petrochemicals and bandwidth.

The Houston-based clearinghouse will provide services independent of price discovery. OTC energy contracts presently are negotiated on a principal-to-principal basis, through electronic exchanges or via interdealer brokers over the telephone. Counterparties currently settle their trades under bilateral agreements, under which each party is exposed to the risk that its counterparty will fail to perform. EnergyClear will take transactions that already have had their price discovery taken care and will substitute itself as the buyer to every seller and the seller to every buyer. "What this actually does for the participant is reduce credit risk while allowing the offset of positions in between the participants in the energy markets," said Lee Burton, president and co-founder of EnergyClear Operations Company.

"EnergyClear will revolutionize the OTC energy markets by reducing the credit, legal, operational, and liquidity risks currently associated with transactions in these markets," he said. "As a result, EnergyClear stands to ultimately increase market depth and liquidity for its participants."

EnergyClear's target market includes traders and risk managers of large power generation, marketing and trading entities in the wholesale power and gas market. Within the energy marketplace, electricity is seen as having the potential to become one of the largest traded commodities in the United States.

But with multiple transactions, credit exposure quickly gets maxed out and consequently marketers can't continue to perform transactions with a given counterparty. With EnergyClear, the clearinghouse steps in and becomes the counterparty to every trade and reduces the credit exposure to individual participants down to a single counterparty. Once the clearinghouse is substituted as the counterparty, it greatly increases the amount of business those companies can do.

This clearinghouse method currently is not done in any over-the-counter commodity markets in the United States and perhaps not anywhere in the world, said Burton. "It's a new concept, certainly for energy in the United States. All successful clearing organizations should increase liquidity in the markets they serve. That's the end result. When you reduce bilateral credit constraints it dramatically increases liquidity in the market."

All successful clearinghouses also have been owned by their participants and that's the plan for EnergyClear. It consists of two entities, EnergyClear Corp. (EC) and EnergyClear Operations Co. LLC (EOC). EC will be owned by leading energy market participants, who will provide industry control, oversight and rule making. The Bank of New York, Prebon Yamane and Amerex will own EOC, and will provide and manage the facilities and technology necessary for the operation of the clearinghouse.

"EnergyClear's dual structure will allow the energy industry to own and govern a clearinghouse without the prohibitive investment that would otherwise be required to develop the necessary infrastructure and provide ongoing support," said Art Certosimo, senior vice president of The Bank of New York.

"Our state-of-the-art technology and operational experience will allow EnergyClear to quickly and efficiently clear and settle transactions, thereby minimizing risk and maximizing performance," he added.

Prebon Yamane is large broker in over-the-counter foreign exchange, money, derivatives, securities, energy and emerging markets and is a participant in a number of B2B exchanges. Last year, the Prebon Group facilitated more than 1.4 million transactions valued at $55 trillion. Amerex also is a large over-the-counter energy broker, providing customers with voice and electronic brokerage services, market liquidity, price discovery, and data services around the globe. Amerex Power Ltd. brokers in excess of 5.5 million MWh of physical electrical power and options on physical power each day. The Bank of New York, which is the oldest bank in the U.S., provides U.S. government securities clearance services and handles the transaction servicing and financing needs of international banks and brokers through its global securities clearance service.

Rocco Canonica

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