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,"
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.