Oldest US exchange to launch energy futures

Merchants’ Exchange, the oldest commodities exchange in the US, is to offer energy futures contracts for the first time.

The move follows an increase in demand for cleared contracts following the bankruptcy of Enron Corp, although Merchants’ Exchange says it had planned the energy futures contracts before the Houston-based energy major filed for Chapter 11 bankruptcy on December 2.

Robert Stewart, president of Merchants’ Exchange, says the exchange plans to offer a block trading function in an attempt to lure the over-the-counter (OTC) market onto the exchange.

“We have taken a keen interest in what happened [to Enron], and on balance we believe it will encourage firms to minimise their counterparty risk by trading through a cleared exchange,” he says.

Contracts will be offered in blocks of 50 or 100 lots to entice OTC players, who he says prefer to trade in bigger contract blocks than are offered on other exchanges.

The six cash-settled futures contracts will cover West Texas Intermediate light, sweet crude oil and Brent crude oil – the world’s two benchmark crude contracts – as well as heating oil, European gas oil, unleaded gasoline and natural gas.

In addition to the block trades, a regular contract size of one lot will be offered. Stewart says the exchange hopes to launch the contracts by the end of February.

The energy contracts build on the exchange’s only existing futures contract, barge freight futures, which started trading in December 2000.

All futures contracts are traded electronically using the data clearing system of Virginia-based software company Savvis.

Now based in Chicago, Merchants’ Exchange was founded in St Louis in 1836. Before the rise of the Chicago Board of Trade (Cbot) it was the country’s leading commodities exchange, but trading volumes dwindled when faced with increased competition from Cbot and the Chicago Mercantile Exchange.

Merchants’ Exchange’s last futures contract prior to the launch of freight futures ceased trading more than 30 years ago, since when the exchange has offered a cash market. It received designation as a futures market from the Commodity Futures Trading Association in July 2000.

The largest US energy exchanges in terms of volume are the New York Mercantile Exchange (Nymex) and Atlanta-based IntercontinentalExchange (Ice). Both have gained liquidity following the demise of EnronOnline.

But Stewart says Merchants’ Exchange is not looking to challenge these players yet.

“Initially we are looking to pull volume from the OTC market,” he says. “We’re hoping to provide a service that is currently lacking through the block trades, but we’re not making any predictions of volume or turnover.”

Merchants’ Exchange is looking to identify gaps in the market-place in order to offer additional contracts, he adds, but he would not give any specific details.