The New York Mercantile Exchange’s (Nymex) announcement late Wednesday that it intends to enter the soft agricultural commodity futures markets ruffled more than a few feathers in the trading world, chiefly those of the New York Board of Trade (Nybot), which accused Nymex on Thursday of a “transparent attempt to interfere” with Nybot’s $1 billion-plus merger with IntercontinentalExchange (ICE).
Last Wednesday, Nymex said it was introducing six new soft commodity futures contracts (Nymex cocoa, Nymex coffee, Nymex cotton, Nymex frozen concentrated orange juice, Nymex sugar #11 and Nymex sugar #14) on the Nymex ClearPort clearing and trading platform. The exchange added that it anticipates listing the contracts on Chicago Mercantile Exchange’s Globex electronic platform by the end of January 2007.
“Nymex is excited to be the first to offer these vital soft commodity futures contracts on an electronic trading and clearing platform,” said Richard Schaeffer, Nymex chairman. “We are proud to provide innovative and timely solutions to our customers based on their risk management needs on a dynamic electronic platform. Launching new product lines, such as Nymex iPort and the soft commodities, is part of our continued efforts to diversify our business.”
The move was widely viewed by people in the industry as a preemptive strike by Nymex in anticipation of the ICE/Nybot union. First announced in September (see NGI, Sept. 18), the merger, which is expected to be completed during the first half of 2007, would bring Nybot, the 100-year-old open outcry exchange for sugar, coffee, cocoa, cotton and other commodities and financial products, together with ICE, an Atlanta-based electronic energy exchange and chief rival to Nymex.
On Thursday, Nybot questioned Nymex’s motives and doubted that the listing of “cash-settled clones of the Nybot flagship soft commodity contracts” had much to do with market demand.
“We believe the Nymex action is a transparent attempt to interfere with the merger of Nybot and IntercontinentalExchange (ICE) that was overwhelmingly approved by the Nybot membership last week,” said Nybot CEO C. Harry Falk. “In our view, this has little to do with market demand for these contracts, but is an obvious attempt to prevent a change in control under Nybot’s valid lease.”
Falk pointed out that Nybot’s lease contains provisions to prevent products that compete with Nymex from being listed on the Nybot trading floor. “Moreover, while it may be tempting for the dominant electronic trading platform to employ pricing power to stifle competition, we do not believe it will succeed,” he said. “We are confident that Nybot’s strong reputation for customer relationships, market depth, high-quality floor broker community and license of the ICE trading platform can withstand competition in soft commodities from competitors with no prior experience.”
Reaction from the industry was mixed. Some said that with Nymex stepping up the competition, ICE’s over the counter (OTC) platform might not be safe.
“They are going right at the ICE/Nybot union in an attempt to take over their business,” said Ed Kennedy, a broker with Commercial Brokerage Corp. “There has always been bad blood between Nybot and Nymex. That rivalry goes way back. Nymex’s move could be successful.”
Calling Nymex’s move into soft goods an “ironic twist,” Fox-Pitt, Kelton analyst Edward Ditmire said Nymex “is attacking Nybot strongholds” with the lure of electronic trading.
“Timing is highly opportunistic, as the ‘electronification’ of an open-outcry market can be a delicate affair,” Ditmire said in a note to clients. “The timing of Nymex’s excursion will pressure ICE to quickly list the Nybot products electronically, which could amplify the disruptive elements of an open-outcry to electronic transition, and make life harder on the floor personnel who control the liquidity in these products.”
The analyst noted that splitting the agricultural markets could be difficult because of low volumes. “Markets need a critical mass to function, and even Nybot’s largest market, sugar, at 12 million contracts [year-to-date], is only about a tenth of the size of the WTI Crude market that Nymex and ICE now split,” he said. “Thus, it is unclear that a small portion of the sugar trade would be sufficient for a robust market.”
With Nymex on the offensive, Ditmire warned that competition to ICE’s OTC platform could be next. “The competitive tension between these two players is staggering, and while we will be watching developments in soft commodities carefully, the possibility that Nymex could become even more offensive, engaging ICE on more fronts, especially its prize OTC platform, seems more likely now.”
The new Nymex futures contracts and their commodity codes are Nymex cocoa (CJ), Nymex coffee (KT), Nymex cotton (TT), Nymex FCOJ (frozen concentrated orange juice) (FJ), Nymex sugar #11 (YO) and Nymex sugar #14 (FT). The contract units will be 10 metric tons for Nymex cocoa futures; 37,500 pounds for Nymex coffee futures; 50,000 pounds for Nymex cotton futures; 15,000 pounds for Nymex FCOJ futures; and 112,000 pounds for Nymex sugar #11 and Nymex sugar #14 futures contracts. For all contracts, the initial contract month will be March 2007. Fees will be waived for the first six months, through June 2007.
Margins and position accountability levels for the soft commodity futures contracts are available on the Nymex website at www.nymex.com/softs.
CME Chairman Terry Duffy said, “Nymex’s entry into the soft commodities market is a bold move and logical extension of their product strategy. We look forward to working closely with Nymex to achieve a successful launch on CME Globex.”
Earlier on Wednesday, Nymex unveiled Nymex iPort, a suite of energy and metals index futures contracts. Nymex iPort products will allow investors to hedge in the Nymex and Commodity Exchange Inc. (Comex) markets using futures indexes. Nymex said the index products will offer broad sector coverage in a single price and a single trading vehicle. Nymex iPort contracts will be available for trading on the Nymex trading floor and the Globex electronic trading platform and for clearing through Nymex ClearPort clearing. “We believe these contracts will serve as an additional risk management tool for our current customers and as an innovative way to enter the energy markets for new customers,” said Nymex CEO James E. Newsome.
On Thursday, the exchange reported that it will launch its first energy index futures contract, 3-2-1 Plus as part of the Nymex iPort suite of index futures contracts beginning on Jan. 21 for trade date Jan. 22. The contract, which will have the code WX, will be cash-settled and comprised of the core Nymex energy futures contracts, light sweet crude oil, RBOB gasoline, heating oil, and natural gas ratios of 3:2:1:1 respectively, divided by a factor of 10 to obtain the index value.
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