After several days of talking to the industry in Singapore last week, a team from the exchange is now in Hong Kong conducting a round of educational seminars to sell the story of its new contracts and membership requirements.
Gary King, chief executive officer of the Dubai Mercantile Exchange, explains its evolution and future.
What is the history of Dubai Mercantile Exchange (DME)?
King: The Dubai Mercantile Exchange is a joint venture between the New York Mercantile Exchange (NYMEX) and Tatweer and the deal was concluded in June 2005. Tatweer, which translates to ôdevelopmentö from Arabic, is a member of Dubai Holding, a government entity, while NYMEXÆs reputation speaks for itself. This combination, where you have a worldwide commodity exchange in the West joining forces with a Middle East government partner, has never happened before and differentiated us from the start. Using the 135-year history of NYMEX in physical commodities combined with a Gulf institution is really creating a local product with global reach.
What will be the main objectives when the Dubai Mercantile Exchange launches?
King: The main objective will be getting the Oman contract to be liquid quickly. High liquidity gives us price transparency, which in turn gives us real price discovery in a well-regulated market, and thatthat provides additional comfort and increased liquidity. If we can achieve this, we will have created a new benchmark. To get the liquidity up very quickly, weÆre working around the clock on our marketing, so that we have everyone up to speed, educated on the products, and with the aim of getting maximum attention from the industry.
DMEÆs crude oil futures contract for Oman is the first product to be launched, could you explain its evolution?
King: WeÆve formed working groups comprised of different specialists from ministries in Oman. We then asked the industry for their comments and announced the memorandum of understanding with the Ministry of Oman in February. It has been a great story since then and every day we are moving a step closer to launch and we tick off another box. We are not releasing an actual launch date yet, but weÆre sticking to the fourth quarter launch as planned.
Why is settlement taking place in Singapore?
King: It will be settled in Singapore daily at 16:30 in a 30-minute window when all the trades are calculated by taking a weighted average of those trades and then posting a final settlement price at 16:30. When meeting all the industry players, they all wanted the settlement to take place in Asia, particularly due to the interdependent relationship between the Middle East and the Far East. Essentially, a lot of crude from the Middle East ends up in Asia and people want to have a Singapore settlement price, which runs in parallel with the settlement of refined product and with refining margins, crack margins, crack spreads, and other hedges they have on their books.
Although we have a settlement time, the contract will not stop trading because it is in a 23 and a half-hour trading environment, five days a week. We selected Singapore because it is a huge refining centre and the fact that it has a huge concentration of oil traders. It was a very logical choice for us because Singapore is where price discovery of refined products is taking place.
YouÆre also developing a jet fuel futures contract, has anything similar ever been launched and why did you decide to launch this?
King: To my knowledge, nothing similar has ever been launched by any other exchange. For us, we thought that it was a natural and logical step in our development. Dubai has a 20-year history of pricing crude oil through the Dubai benchmark and it was a logical evolutionary process for us to move to a commodity exchange and provide a new benchmark for crude oil.
When are you looking to launch the jet fuel futures contract?
King: WeÆre aiming to launch this contract in 2007 and currently studying it. With the Oman contract, we put together a working group, which was made up of specialists from within and outside the organization. We will do the same with jet fuel contract. WeÆve already signed a memorandum of understanding with Emirates National Oil Corporation (ENOC) to form a working group, and we will seek other international industry players to join. We will also aim to invite consumers of jet fuel to join the study group, as well as other refiners and maybe some traders. Leading up to the launch, we will also hold one-on-one meetings with industry players and determine what they want in the contract.
Could you explain the membership structure of DME?
King: We are operating on a three-category membership structure. Floor membership will be comprised of institutions that will take a seat on the floor. We believe that the DME will benefit from having a real energy community on the floor and this is something that is extremely visceral, even though weÆre an electronic exchange. In the Middle East, it is something that is very possible to do and capture the spirit of a real energy community - and Dubai is well-suited to this.
Is DME actively looking for members of the Asia trading community to join the structure?
King: What we want to have on that floor is a wide spectrum of players. From a geographical perspective, weÆd like to have local firms from the United Arab Emirates, regional firms and international firms. To further sub-divide this, weÆd also like to have a wide combination of energy players, banks, brokers, financial institutions and traders. We want a cosmopolitan nature on our trading floor and this concept and ambition has been very well received during the seminars weÆve been holding.
YouÆre currently doing roadshows in Asia, what have you been hearing?
King: WeÆre flat out meeting everybody and will be going through the region for the next few weeks on our education series. It kicked off in Singapore during the annual APPEC event, which has become an institution for our industry and a forum where we could make some key announcements. During every one of these seminars, more and more is coming out. Now everyone is seeing that this contract is geared up for a launch. People are waiting and watching to see how the Oman contract develops. You have a Middle East producer pricing oil of a local exchange, and they see this as groundbreaking news.
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