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-----Original Message----- From: =09"Zerilli, Frank" <fzerilli@POWERMERCHANTS.COM<@ENRON [mailto:IMCEA= NOTES-+22Zerilli+2C+20Frank+22+20+3Cfzerilli+40POWERMERCHANTS+2ECOM+3E+40EN= RON@ENRON.com]=20 Sent:=09Thursday, September 06, 2001 1:48 PM To:=09PMG Principals; Dennis, Robert; Lynch, Justin; Marcotte, Tom; Leo, An= dre Cc:=09Arnold, John Subject:=09=20 ICE Melts Resistance ToOil Swaps. =20 09/03/2001 PetroleumIntelligence Weekly=20 P1=20 © 2001 Energy Intelligence Group. All rights reserved=20 The oil hedging business is poised to take another step up the evolutionary= ladder, after the upstart IntercontinentalExchange(ICE) confirmed plans to= offer clearing services for its over-the-counter contracts from the fourth= quarter of this year. With similar moves also planned by the New York Merc= antile Exchange (Nymex), OTC contracts such as swaps are increasingly movin= g into the mainstream. Long regarded as the wild cousins of regulated futur= es, OTC oil contracts were distinguished by their fuzzy legal status, lack = of standardization, and absence of clearing services. Changes in USlaw and = the spread of electronic trade have pretty much eroded the first two differ= ences, and the ICE initiative will deal with the third. The main difference= s now lie in regulation and settlement (40#02-06). ICE'sclearing services w= ill be provided by the London Clearing House (LCH) - the clearinghouse for = London's International Petroleum Exchange (IPE), which was taken over by IC= E last month. ICE will now be able to offer a one-stop hedging shop for cle= ared futures and derivative contracts, allowing traders to use a single loc= ation to conduct full hedging strategies and to pool their risk. One advant= age is that it will allow net margining between IPE Brent futures and other= ICE products, such as West Texas Intermediate swaps. Clearinghouses offer = financial risk protection, acting as a central party to shield traders agai= nst counterparty default. Derivatives trade at ICE is currently conducted b= etween companies on the basis of bilateral credit agreements.=20 ICE'sinitiative in part reflects its increasingly fierce competition with N= ymex. The New Yorkexchange will this week launch its new Brent crude future= s and options contracts, as a direct challenge to the merged ICE-IPE (40#35= -04). In return, ICE will first introduce clearing services for two activel= y traded USproducts, involving West Texas Intermediate crude oil swaps and = Henry Hub natural gas swaps. These swaps are the planned centerpiece for Ny= mex'slong-delayed internet platform, eNymex(40#04-05). They also pose a pot= ential challenge to Nymex'stwo core futures contracts, if trade migrates to= swaps. Some traders view swaps as more effective hedging tools. Calendar-m= onth WTI swaps, for example, are widely used to hedge against producer or r= efiner supply contracts, which use average prices during calendar rather th= an contract months.=20 The evolution of swaps is also part of a deeper market trend, which has bee= n actively encouraged by the USgovernment and some big energy companies. Th= e UShas been working to give derivatives a stronger legal framework since t= he late 1990s, after Russiadefaulted on its debt and the Long-Term Capital = Management hedge fund came to the brink of collapse. That effort culminated= in legislation late last year giving derivatives a stronger legal footing,= thus eliminating the chance that parties might renege on unfavorable contr= acts by claiming they were really unauthorized futures deals. The spread of= electronic trade - particularly on ICE - has accelerated the change, by en= couraging liquid trade in standardized products. This is no accident. In an= interview with PIW a year ago, John Browne, chief executive of BP - one of= ICE'sfounders - said that the platform had been set up in an attempt to cr= eate "a real exchange market for swaps, rather than simply one-off, over-th= e-counter activity." This would make hedging more transparent and efficient= , while eroding the role of intermediaries, he said. Browne drew parallels = with the earlier evolution of interest-rate swaps in financial markets, int= o "a standardized business." (39#27-08).Last week, ICE Chief Executive Jeff= rey Sprechersaid the exchange wants "to try to change the way the market wo= rks."
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