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

It is anticipated that EnergyClear initially will offer itsservices to participants in the wholesale power and natural gasmarkets as early as the spring of 2001. In the future, EnergyClearanticipates servicing contracts for other OTC commodities such ascrude oil, petroleum products, petrochemicals and bandwidth.

The Houston-based clearinghouse will provide servicesindependent of price discovery. OTC energy contracts presently arenegotiated on a principal-to-principal basis, through electronicexchanges or via interdealer brokers over the telephone.Counterparties currently settle their trades under bilateralagreements, under which each party is exposed to the risk that itscounterparty will fail to perform. EnergyClear will taketransactions that already have had their price discovery taken careand will substitute itself as the buyer to every seller and theseller to every buyer. “What this actually does for the participantis reduce credit risk while allowing the offset of positions inbetween the participants in the energy markets,” said Lee Burton,president and co-founder of EnergyClear Operations Company.

“EnergyClear will revolutionize the OTC energy markets byreducing the credit, legal, operational, and liquidity riskscurrently associated with transactions in these markets,” he said.”As a result, EnergyClear stands to ultimately increase marketdepth and liquidity for its participants.”

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

But with multiple transactions, credit exposure quickly getsmaxed out and consequently marketers can’t continue to performtransactions with a given counterparty. With EnergyClear, theclearinghouse steps in and becomes the counterparty to every tradeand reduces the credit exposure to individual participants down toa single counterparty. Once the clearinghouse is substituted as thecounterparty, it greatly increases the amount of business thosecompanies can do.

This clearinghouse method currently is not done in anyover-the-counter commodity markets in the United States and perhapsnot anywhere in the world, said Burton. “It’s a new concept,certainly for energy in the United States. All successful clearingorganizations should increase liquidity in the markets they serve.That’s the end result. When you reduce bilateral credit constraintsit dramatically increases liquidity in the market.”

All successful clearinghouses also have been owned by theirparticipants and that’s the plan for EnergyClear. It consists oftwo 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. TheBank of New York, Prebon Yamane and Amerex will own EOC, and willprovide and manage the facilities and technology necessary for theoperation of the clearinghouse.

“EnergyClear’s dual structure will allow the energy industry toown and govern a clearinghouse without the prohibitive investmentthat would otherwise be required to develop the necessaryinfrastructure 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 willallow EnergyClear to quickly and efficiently clear and settletransactions, thereby minimizing risk and maximizing performance,”he added.

Prebon Yamane is large broker in over-the-counter foreignexchange, money, derivatives, securities, energy and emergingmarkets and is a participant in a number of B2B exchanges. Lastyear, the Prebon Group facilitated more than 1.4 milliontransactions valued at $55 trillion. Amerex also is a largeover-the-counter energy broker, providing customers with voice andelectronic brokerage services, market liquidity, price discovery,and data services around the globe. Amerex Power Ltd. brokers inexcess of 5.5 million MWh of physical electrical power and optionson physical power each day. The Bank of New York, which is theoldest bank in the U.S., provides U.S. government securitiesclearance services and handles the transaction servicing andfinancing needs of international banks and brokers through itsglobal securities clearance service.

Rocco Canonica

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