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 -----Original Message-----
From: 	"Zerilli, Frank" <fzerilli@POWERMERCHANTS.COM>@ENRON [mailto:IMCEANOTES-+22Zerilli+2C+20Frank+22+20+3Cfzerilli+40POWERMERCHANTS+2ECOM+3E+40ENRON@ENRON.com] 
Sent:	Thursday, September 06, 2001 1:48 PM
To:	PMG Principals; Dennis, Robert; Lynch, Justin; Marcotte, Tom; Leo, Andre
Cc:	Arnold, John
Subject:	 


ICE Melts Resistance ToOil Swaps.
  
09/03/2001
PetroleumIntelligence Weekly 
P1 
(c) 2001 Energy Intelligence Group. All rights reserved 
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 Mercantile Exchange (Nymex), OTC contracts such as swaps are increasingly moving into the mainstream. Long regarded as the wild cousins of regulated futures, 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 differences, and the ICE initiative will deal with the third. The main differences now lie in regulation and settlement (40#02-06). ICE'sclearing services will be provided by the London Clearing House (LCH) - the clearinghouse for London's International Petroleum Exchange (IPE), which was taken over by ICE last month. ICE will now be able to offer a one-stop hedging shop for cleared futures and derivative contracts, allowing traders to use a single location to conduct full hedging strategies and to pool their risk. One advantage 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 against counterparty default. Derivatives trade at ICE is currently conducted between companies on the basis of bilateral credit agreements. 
ICE'sinitiative in part reflects its increasingly fierce competition with Nymex. The New Yorkexchange will this week launch its new Brent crude futures 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 actively traded USproducts, involving West Texas Intermediate crude oil swaps and Henry Hub natural gas swaps. These swaps are the planned centerpiece for Nymex'slong-delayed internet platform, eNymex(40#04-05). They also pose a potential challenge to Nymex'stwo core futures contracts, if trade migrates to swaps. Some traders view swaps as more effective hedging tools. Calendar-month WTI swaps, for example, are widely used to hedge against producer or refiner supply contracts, which use average prices during calendar rather than contract months. 
The evolution of swaps is also part of a deeper market trend, which has been actively encouraged by the USgovernment and some big energy companies. The UShas been working to give derivatives a stronger legal framework since the 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 contracts by claiming they were really unauthorized futures deals. The spread of electronic trade - particularly on ICE - has accelerated the change, by encouraging 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 create "a real exchange market for swaps, rather than simply one-off, over-the-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, into "a standardized business." (39#27-08).Last week, ICE Chief Executive Jeffrey Sprechersaid the exchange wants "to try to change the way the market works."