February 6, 2006

NYMEX Clearing Firm Says ICE Froze It Out

NEW YORK (HedgeWorld.com)--MBF Clearing Corp., a clearing member of the New York Mercantile Exchange, filed a civil antitrust action against the Intercontinental Exchange, Atlanta, Thursday [Feb. 2], alleging that ICE breached a contract in order to maintain a monopoly in the markets for electronically traded natural gas and oil futures contracts.

Kelly Loeffler, ICE vice president of investor and public relations, said Friday that she hadn't seen the complaint, and she declined to comment on any of its contentions.

The complaint makes reference to the "intense rivalry" between ICE and NYMEX, one of the most recent manifestations of which is the announcement that NYMEX will introduce an electronically traded contract for Brent Crude, a contract approved by the United Kingdom's Financial Services Authority for trading beginning Jan. 26.

MBF plans to be a market maker for those contracts.

In November 2005, MBF and ICE entered into a contract allowing MBF and its customers direct access to ICE. Before that, ABN Amro, an ICE clearing firm, had mediated MBF and its customers' access to ICE. This agreement provides for 30 days' written notice in the event of its termination by either party.

But on Dec. 7, John Hill of ICE informed an MBF employee "flatly that ICE had shut down MBF's access." The complaint alleges that Mr. Hill was explicit that the shutdown was the result of the competitive threat that MBF posed to ICE by virtue of its role as a volume creator on NYMEX's developing electronic platform. He offered another reason for the cut-off too: that MBF's clients weren't conducting enough business on ICE to justify the continued connection.

The complaint maintains that this cut-off of MBF was one instance of a broader and illegal pattern of anti-competitive conduct on ICE's part, and asks for a monetary award for the damage the action has done to MBF (under antitrust law, the actual damages are trebled in the award) as well as injunctive relief.

One of the issues in the litigation that this complaint initiates is bound to be the impact of a provision of the contract between ICE and MBF that mandates the private arbitration of disputes between the parties. The plaintiff asked the court to declare that provision "null, void, and contrary to public policy."

The complaint notes the tremendous growth since 1996 in energy commodities as an asset class. In that year, US$2 billion was invested in funds that track the Goldman Sachs Commodity Index, which was 62% energy. By the end of 2004, the dollar-weighted allocation of the GSCI to energy was up to 71%, and more than US$30 billion was invested to track it.

In April 2005, ICE closed the open-outcry market it had operated in London, formerly the International Petroleum Exchanges' trading floor, and it now does all its business electronically.

Bruce H. Schneider represents MBF in its lawsuit. Mr. Schneider is a partner with Stroock & Stroock & Lavan LLP in New York.

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.

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