Nymex feels an unwelcome pinch
Kevin Morrison, FT Syndication Service
NEW YORK: The recent dismissal of a legal case by the New York Mercantile Exchange (NYMEX) against its rival the Intercontinental Exchange, and US politicians in Washington calling for closer scrutiny of petroleum product futures pricing is putting new competitive and regulatory pressure on the world's largest energy futures exchange.
A US district judge rejected on September 30 Nymex's claims of copyright and trademark infringement by ICE, an electronic commodities exchange and owner of the International Petroleum Exchange in London -- home to Brent futures trading -- for ICE's use of Nymex's settlement prices in electronic energy trading and clearing operations.
Nymex, which filed the lawsuit nearly three years ago, said it planned to appeal the decision by Judge John Koeltl.
"We are currently reviewing our options. We believe that the court's recent opinion and order is incorrect and expect to appeal the decision," James Newsome, Nymex president, said after the ruling.
Nymex claimed that ICE was violating copyright law by using Nymex futures settlement prices in contracting and clearing processes.
Nymex also said it was being deprived of "substantial revenues and profits" as a result of the copying.
The decision by Judge Koeltl was mainly based on the fact the copyright office would not grant Nymex a copyright registration in response its application in March 2002.
The ruling overcomes a large hurdle for ICE in its attempt to make an initial public offering. The latest ruling follows a decision by Judge Koeltl in July 2004 when he dismissed ICE's counterclaim against Nymex.
The ruling also enhances ICE's over-the-counter energy trading business which is its largest operation after its IPE activities. ICE provides an OTC electronic platform for trading.
The energy derivatives trading world is split between futures exchanges, such as Nymex and the IPE, and the OTC market where trading is done between bilateral parties. Prices on OTC trades are determined by the prices settled on futures markets.
ICE would not comment on the ruling because the exchange is in a quiet period due to its impending IPO. However, somebody close to ICE said Nymex prices only formed a component of its settlement prices.
"This [ruling] will give further impetus to the OTC market," said one person familiar with Nymex.
"The market will be more confident with OTC pricing, and it therefore will be prepared to trade more on the OTC market, and that could be to the detriment of futures exchanges," said the person familiar with Nymex.
Although there is no official data, energy traders say the energy OTC market is two to three times bigger than the energy futures exchange market, where up to 500,000 crude oil contracts are traded every day on Nymex and IPE.
This trading volume alone equates to almost six times the amount of oil consumed each day.
Traders said OTC markets were cheaper to deal in than exchanges and trades were tailored to requirements of customers and subject to a lighter regulatory regime than on futures exchanges.
Nymex is regulated by the Commodity Futures Trading Commission, and it may face further regulatory scrutiny. The Federal Trade Commission plans to investigate how the price of Nymex gasoline futures are set as part of its nationwide probe into petrol prices in the aftermath of Hurricane Katrina, including any evidence of price-gouging.
The FTC investigation is part of the Gasoline for America's Security Act, which is a bill to allow further US petrol refinery capacity increases. Nymex gasoline futures jumped 42 per cent in the wake of Katrina, sending US retail prices to record nominal levels.
Although Nymex traders like wild fluctuations in prices, consumers and politicians prefer steady prices.
The court ruling and a more inquisitive Washington come as Nymex faces stronger competition in some of its businesses. Recently, the Chicago Board of Trade said it had captured 7.5 per cent of the US-listed exchange-traded precious metals futures market after one year of launching its electronic precious metals contracts.
Comex, Nymex's metals arm, is the world's largest gold futures market. CBOT's neighbour, the Chicago Mercantile Exchange, has long been thought likely to enter the energy futures business, a move that will be easier following the September 30 court ruling on Nymex pricing.
"If CBOT can after one year take a sizeable amount of Comex business with an electronic contract, what could the CME do after a year if it launced a WTI [West Texas Intermediate] contract?" said the person familiar with Nymex.