IntercontinentalExchange (ICE) flexed its muscles on Thursday, revealing its strong position in the U.S. over-the-counter (OTC) natural gas market. The exchange said about one million natural gas contracts have been cleared through its system since March with a notional value of about $10 billion. ICE said it also set a new daily cleared volume record for natural gas transactions in the United Kingdom on Thursday and has cleared more than one billion therms in the that country since September.

David Donat, manager of operations and risk control at Conectiv Energy Supply, said the key to ICE’s success has been the number of counterparties using the system. “We are able to trade with more counterparties, meaning increased liquidity, and we reduce our credit exposure in those markets,” he said. “Our bilateral lines are then used more efficiently in markets where clearing is not available. We believe every firm that trades on ICE should get set up to clear.”

Trading on ICE grew exponentially after the fall of Enron Corp. and its tremendously popular proprietary trading platform, Enron Online, late last year. ICE signed a deal with the London Clearing House (LCH) in August 2001 to have LCH provide clearing services for gas trades in the United States and the United Kingdom that are done on ICE. Clearing services started last spring.

ICE’s main rival, the New York Mercantile Exchange, also provides clearing of OTC natural gas products and said last week that $1.5 billion in OTC instruments (for natural gas, power and other commodities) have been cleared since clearing services began at the end of May. Nymex said that as of Nov. 1 it had cleared 441.1 trillion Btus of gas and 152,800 MWh of power. Open interest as of the end of the day on Nov. 1 was valued at $838 million and was equivalent to 262.3 trillion Btus of natural gas and 34,400 MWh of electricity.

Nymex provides clearing of natural gas transactions at the Henry Hub and seven principal basis pricing points in the United States: Chicago Citygate, Houston Ship Channel, Northwest Pipeline Rockies, Panhandle Eastern Pipe Line Co. Texas-Oklahoma mainline, San Juan Basin, Southern California, and Transco Zone 6 New York, as well as electricity transactions at the Pennsylvania-New Jersey-Maryland regional power hub (PJM Interconnection). Currently ICE provides clearing only for transactions at the Henry Hub.

“The rapid and continued growth of cleared OTC transactions, its growing open interest, and the widening geographic scope of that business is an affirmation of the financial integrity of the exchange clearinghouse which serves as a shield against the risk of counterparty default,” said Nymex President J. Robert Collins Jr. He added that OTC clearing allows energy market participants the flexibility of negotiating their own deals and submitting them to the exchange. The exchange also nets the positions of cleared OTC and exchange transactions to determine margin rates, reducing costs and improving cash flow.

A new rival stepped into the OTC ring with Nymex and ICE last month. Houston-based EnergyClear launched its own OTC clearinghouse for power and gas trades during the first week in October. EnergyClear also is registered as a derivatives clearing organization with the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act.

Thomas J. Perna, senior vice president of The Bank of New York, which is one of the owners, said the clearing platform would “facilitate the settlement of energy-forward contracts and energy derivatives, and help mitigate credit risk in this marketplace.”

Houston-based EnergyClear Operations Co. (EOC) will use a multi-layered clearing application tailored to meet the needs of the OTC commodity markets. In addition to providing real-time credit-checking capabilities, the EOC system allows users the control in customizing accounts and integrating existing technologies with a clearing application interface. Other services, including margin collateral management and market surveillance, also will be provided.

“With our scalable and sophisticated clearing technology, I am confident that EOC will be instrumental in providing the standardization and liquidity to the OTC industry that is so vital to organized commodity markets,” said EOC President H. Lee Burton.

EOC, which relocated to Houston earlier this year, is owned by The Bank of New York, Prebon Yamane and Amerex. Prebon Yamane is an intermediary for a broad range of OTC foreign exchange, money, derivatives, securities, energy and emerging markets, and is a participant in several B2B exchanges. For more information on EnergyClear, contact the company through its web site, www.energyclear.com.

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