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CME Will Offer Dubai Mercantile Exchange Contracts

- Updated June 30, 2010

The Chicago Mercantile Exchange (CME) announced Nov. 10 that all Dubai Mercantile Exchange (DME) contracts, including Oman crude oil futures, will begin trading on the CME Globex platform in first-quarter 2009, pending approval from the DME board.

Following the transition, which will see DME abandon its trading platform, the world’s three benchmark crude oil contracts–West Texas Intermediate and Brent are the others–will be available on a single system. Trading all three contracts on Globex will create “opportunities for new trading strategies,” said Jeremy Hughes, associate director of CME Group.

“The same access criteria and benefits will apply to all users globally,” explained Hughes. “We also have a number of incentive schemes to assist new regional participants in Europe and Asia.” CME Globex offers around-the-clock access to derivatives products in more than 85 countries and foreign territories.

CME Group owns a 20 percent stake in DME, inherited in its August acquisition of the New York Mercantile Exchange (Nymex), which founded the Dubai exchange with Tatweer–a member of Dubai Holdings–and the Oman Investment Fund. Earlier this year, DME, which launched in June 2007, sold stakes to a group of financial institutions and energy trading firms including Goldman Sachs, Morgan Stanley, Vitol and Concord Energy.

“The transition to CME Globex marks an important milestone in this second phase of growth for the DME,” said Thomas Leaver, chief executive of the Dubai energy futures and commodities exchange, in a statement. “The visibility and reach offered by CME Globex will give further impetus to the growing liquidity of the DME contracts, and we are confident that this is a strong first step in a long and productive partnership with the CME Group.”

“As the Oman contract is relatively less established than the other two crude oil benchmarks, this would be a great opportunity to increase visibility, trading volume, and most importantly liquidity,” said Chermaine Lee, New York-based analyst with Celent. “But in DME’s case, they would also be losing out on related trading and data fees.” Lee noted that for CME, a potential acquisition of the Dubai exchange would be a “natural strategic expansion,” but “nationalistic reasons might prevent DME from going in this direction.”

According to CME, the integration of the three benchmark contracts will supply its customers with a transparent mechanism to determine the price of crude oil imported into Asian countries in particular. “If traded on different exchanges, there is inevitably a chance for a difference in prices,” said Zhiyong Zhang, futures analyst and head of Shanghai-based Guotai Junan Securities Research Institute. “After integration into one platform, there will be fewer chances of price differentiation, which in turn will enhance liquidity and have a positive effect on the whole market.”

Zhang added that the migration of the DME contracts will give Asian refiners an opportunity for better risk management and could lead to advanced hedging and arbitrage strategies. However, he said, there will not be many differences in terms of operation, even though Globex offers access 24-7. “Both Asian and European customers have already gotten used to trading in multiple markets in different time zones,” he said.

“By integrating DME’s energy contracts with our existing benchmark crude oil products,” said chief executive Craig Donohue, CME will provide its customers “with the products necessary to manage their risk and exposure to the fundamental issues driving energy prices. The growth potential of the Oman crude oil futures contract, particularly in Asia, makes it an attractive addition for CME Group customers wishing to augment their existing trading strategies. In turn, energy market participants in the Middle East and Asia gain critical access to a worldwide pool of liquidity through CME Globex.”

CME’s Hughes declined to reveal any plans for new products but said that they are actively reviewing opportunities in the global energy markets, including new over-the-counter instruments cleared through Nymex’s ClearPort facility, an Internet-based network that provides a gateway to trading and clearing services.

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