Officials from energy trading exchanges recently agreed that liquidity in energy markets continues to improve after a prolonged period of the doldrums resulting from Enron Corp.’s historic collapse in late 2001 and a string of subsequent scandals that throttled the energy sector and cast a pall over the future direction of trading.

“We’ve seen great improvement in liquidity” in the natural gas and electricity markets “and we expect it to continue,” said Bob Levin, senior vice president of research at the New York Mercantile Exchange (Nymex), in a conference call on Friday sponsored by Restructuring Today.

“We think that what has harmed liquidity the most has been some structural changes that occurred,” Levin said. “It probably started with the credit cycle and hit many of the merchants, but the trend, from our perspective, has completely reversed and is growing.” Nymex sees “a lot of confidence by participants in the marketplace and the variety of instruments that are at their disposal.”

“Over the last year or so, we have seen liquidity come back in quite a bit,” added Michael Prokop, senior vice-president of Amerex Energy. “We’ve seen our volumes pick up substantially,” he added. Amerex, founded in 1978, is an over-the-counter energy brokerage.

The rebound in liquidity and spike in volumes can be attributed to a couple of factors, Prokop said. “We have seen these different clearing solutions come into the marketplace,” he said. “Right now, we have up and working ICE [IntercontinentalExchange] and Nymex, which our customers are using. Not all of our transactions go through there, but obviously there’s some players in the marketplace that need that facility more than others.”

Also, Prokop said that the volatility seen in the energy marketplace over the last two years “actually wasn’t a bad thing in that it got some different players of a different flavor into the marketplace,” citing the entry of fund management-type companies and Wall Street banks. “That’s not such a bad thing. This market shouldn’t have just marketers and utilities in it because of the liquidity problem. You want to try to open it up to as many entrants and participants as possible and if volatility does create that entry gateway, then so be it and what that does then is that added volume does create that added liquidity and tends to smooth down the price spikes that we had seen some time ago.”

Becky Kilbourne, marketing and regulatory affairs executive of the North American Energy Credit Clearing Corp. (NECC), also participated in the conference call. NECC is a clearing platform being formed in conjunction with ICE and the Clearing Corp. of Chicago.

“Basically what we think about the liquidity problem — it’s really the seam theme,” she said. “It has a lot to do with uneven and escalating credit requirements between the physical and the financial markets and we think the industry is getting dangerously close to further crisis due to default events because of this problem,” she said.

More and more transaction volume is moving towards near-term spot markets, particularly those operated by regional transmission organizations (RTOs). “That increases the volatility in the market, which causes more and more mark-to-market variations in longer term markets, thus requiring more collateral, thus moving more and more volumes to the short-term market,” Kilbourne said. “We think this is a cycle that won’t go away without a clearing solution and the clearing solution has to be one that covers both the physical markets of the RTOs and extends itself to the OTC markets.”

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