ICE, Nymex Make Announcements, Seem Headed in Two Directions

The IntercontentinalExchange (ICE) and its chief competitor, the New York Mercantile Exchange (Nymex), seem to be going in different directions, judging by announcements made by each last week. Fast-growing ICE plans to offer clearing for its over-the-counter contracts in the fourth quarter of this year, in a first move to link its online trading platform with the regulated futures market. The London Clearing House (LCH) will be the financial counterpart for ICE traders. LCH and ICE signed an agreement in New York last week. Both were already linked: LCH is the clearing house for the London-based International Petroleum Exchange (IPE), which was taken over by ICE last month. Nymex, on the other hand, announced a delay in the introduction of Internet-based Nymex Access electronic trading to allow more time for member firms to address issues raised by firewall protections and for individual traders to upgrade computer equipment. The ICE clearing service will allow market participants to pool their positions held on the Internet and on the traditional, regulated market. The option to clear via LCH will blend these markets, and link participants in both ICE and IPE, who many times are the same players, including oil firms, commodities traders and banks. ICE's Chief Executive Officer Jeffrey Sprecher said that adding a financial layer to its over-the-counter (OTC) trading platform should provide new trading opportunities and maximize the synergies between ICE and the IPE. "We want to try to change the way the market works," he said, promising that new products would be developed. The first OTC contracts to be cleared via LCH are the most actively traded contracts on the electronic ICE platform: cash-settled US oil swaps and US natural gas swaps. Currently, over 10,000 oil contracts are traded daily, and over 5,000 gas contracts. For the clearing to become official and global, LCH needs US recognition as a derivatives clearing organization from the Commodity Futures Trading Commission. Approval is expected soon, though the wait is likely to push the launch of the global clearing to October. Trading at ICE is currently between companies on the basis of bilateral credit agreements. With LCH coming into play, these parties could use the clearing house to do the financial side of the deal. LCH is the seller to every buyer and the buyer to every seller, making trades easier and safer, ICE claims. A clearing house also monitors the trading position of all participants and warns traders when their outstanding risk is getting dangerously high. By linking OTC and IPE, traders can "cross-margin" their trading positions, freeing up capital for other activities. --John van Schaik