The New York Mercantile Exchange (NYMEX) and the Board of Trade Clearing Corp. (BOTCC) are both in the running to provide clearing services and software to BrokerTec Global LLC. The Jersey City, N.J.-based BrokerTecan electronic inter-dealer brokerage firm backed by a consortium of large investment bankshas already chosen Stockholm, Sweden-based OM Technology as its trading systems supplier and is now on the prowl for a clearing partner.
Casting out its Clearing 21 software as bait, the NYMEX is attempting to negotiate a contract that would make the exchange the exclusive clearing supplier of BrokerTec. The BOTCC, on the other hand, is trying to land the BrokerTec clearing contract by emphasizing the fact that it has $100 million in default insurance and a AAA credit rating from Standard & Poors.
A source close to the NYMEX says that the exchanges executive committee has already recommended a BrokerTec clearing partnership to NYMEXs board. Under such a partnership, says the source, BrokerTec would set up a U.S. clearing arm and that organization would use NYMEXs Clearing 21 software. In addition, NYMEX would provide margin collection, processing, banking and credit support for the BrokerTec clearing entity.
In return, the source says, NYMEX would ask to receive a percentage of BrokerTecs profits and would also charge a small fee for each trade it clears. The price of that fee, the source adds, would likely be contingent upon BrokerTecs trading volume.
Factors that could make or break the deal include the exclusivity and length of the contract. NYMEX also would like the right to provide clearing to BrokerTecs European arm, says the source.
If both sides can agree to terms, the source concludes, a BrokerTec/NYMEX clearing alliance could be in place by the second quarter. However, a source close to the BOTCC says that the CBOTs clearing arm has also had very serious discussions with BrokerTec.
What the BOTCC would really be offering them is their credit worthiness and their AAA rating, says this source. Im not saying that NYMEX is a weak sister, but when it comes to dollar resources, I would suspect that the BOTCC has an inside track.
Officials at BrokerTec decline to comment. But a spokesperson for the firm says that BrokerTec is having ongoing clearing discussions with a number of firms. While declining to specify those firms, she says BrokerTec has yet to reach any final clearing arrangement.
That said, if either NYMEX or the BOTCC bag BrokerTec, the deal could have repercussions in the Chicago derivatives markets. The BOTCC, of course, acts as the clearing arm of the Chicago Board of Trade. And the CBOT sees BrokerTecwhich expects to trade fixed-income securities, futures and options after its scheduled launch in the first half of this yearas a potential competitor.
The source close to BOTCC says that the CBOT is unhappy with the BrokerTec clearing talks. However, since the BOTCC is an independent organization, it is free to strike clearing deals with other exchanges. The CBOT is not excited about the fact that BOTCC is spreading its wings, but theyre resigned to it, says the source.
A CBOT spokesperson declines to say whether the exchange is displeased with the BOTCC/BrokerTec talks. But he concedes that there is nothing the exchange can do about it because the CBOT has no formal contract with BOTCC.
Meanwhile, a NYMEX/BrokerTec clearing alliance could have a positive impact on the Chicago Mercantile Exchange. The NYMEX and CME co-developed Clearing 21the software NYMEX is considering licensing to BrokerTec. A CME spokesperson declines to comment on whether the exchanges are co-marketing Clearing 21. She also refuses to say whether the CME is involved in NYMEXs talks with BrokerTec.