The New York Mercantile Exchange (Nymex) will launch over-the-counter (OTC) energy clearing services for 25 of the most commonly traded OTC energy contracts, giving the energy markets new products to trade, much needed trading security and new trading flexibility. Nymex plans to launch the services on May 31.

“Recent events in the energy markets have once again brought to the fore the urgency of mitigating counterparty risk for over-the-counter (OTC) transactions,” said Exchange President J. Robert Collins Jr. “OTC clearing brings an entirely new dimension of reliability to the marketplace and will also offer participants the opportunity to increase cash flow by reducing margins for offsetting positions in the futures and OTC markets.”

The new clearing services will cover a variety of common location- and index-based OTC products. The transactions will not be displayed by Nymex, but will remain confidential. Once two parties complete a transaction covering the common OTC products, they will be posted with Nymex, marked-to-market and cleared by the Exchange.

Nymex also is planning to launch its “E-mini” futures products “shortly after” OTC clearing services are launched. An agreement in February with the Chicago Mercantile Exchange (CME) called for “mini” versions of key Nymex energy futures contracts to be launched listed for trading on CME’s GLOBEX electronic trading platform and clearing at Nymex. The agreement called for the two exchanges to launch smaller, electronically traded versions of Nymex’s crude oil, natural gas, heating oil and gasoline futures contracts. Precious metals contracts may be introduced in subsequent phases.

Modeled after CME’s popular line of E-mini stock index contracts, which are one-fifth the size of the standard-sized contracts, the E-mini energy and precious metals futures would be a fraction of the size of the standard-sized Nymex contracts. Some of the OTC products for clearing would be of similar size.

Under a cross-access program, CME members will be granted access to GLOBEX to trade the E-mini versions of the energy futures products and to Nymex Access to trade Nymex division products listed on that system. CME members who are not members of Nymex will receive discounts for these trades. Similarly, Nymex members will receive access to GLOBEX and discounts on fees for CME products traded on GLOBEX. The exchange officials said that a cross-margining program will provide capital efficiencies. Unlike their standard-sized counterparts, the new E-mini products will be cash-settled to the respective Nymex futures contract month final settlement price on the last day of trading. Two contract months will trade at any given time.

The OTC products, E-Mini futures and Nymex traditional futures contracts will create numerous new hedging and arbitrage opportunities for a much larger industry population, according to some observers.

“What’s important about this for natural gas — and you can use the analogy for the other energy markets as well — is that smaller industrial, commercial companies and producers of natural gas will now have access to new products,” said Tom Saal of Pioneer Futures. It will be good for the industry, for futures brokers and for smaller speculators. “I expect an increase in trading in both the OTC markets, which obviously will take off. The locals on Nymex will be arbitraging the spread between the pit traded price and the OTC price.

“The counterparty credit risk has helped the big contract, but I think these small contracts will also bring incremental value to the big contract, because these guys (Nymex locals) are going to have to arbitrage them.”

The exchange is going to accept OTC trades for clearing from 7:30 a.m. to 1:30 p.m. EST each business day. The products that will be allowed for clearing include the following:

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